peru: 2015 article iv consultation--press release; staff report; and

© 2015 International Monetary Fund

IMF Country Report No. 15/133

PERU 2015 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR PERU

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2015 Article IV consultation with Peru, the following documents have been released and are included in this package: A Press Release summarizing the views of the Executive Board as expressed during its

May 20, 2015 consideration of the staff report that concluded the Article IV consultation with Peru.

The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 20, 2015, following discussions that ended on March 25, 2015, with the officials of Peru on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 5, 2015.

An Informational Annex prepared by the IMF.

A Staff Statement updating information on recent developments.

A Statement by the Executive Director for Peru.

The document listed below has been or will be separately released. Selected Issues Paper

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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International Monetary Fund Washington, D.C.

May 2015

Press Release No.15/240 FOR IMMEDIATE RELEASE May 27, 2015

IMF Executive Board Concludes 2015 Article IV Consultation with Peru On May 20, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Peru.1 Peru remains one of the best performing economies in Latin America, with solid macroeconomic policies and fundamentals and visible gains in poverty reduction. However, like most of the region, Peru faced a challenging external environment in 2014. Lower metal prices and weaker demand from trading partners were a major drag on private investment and exports. On the domestic front, an unexpected drop in subnational public investment level and temporary supply disruptions in mining, fishing, and agriculture compounded external shocks. Against this background, real GDP growth slowed to 2.4 percent in 2014, from 5.8 percent a year earlier. Headline inflation closed the year slightly above the upper band of the central bank’s target range due to supply shocks, but expectations remained well anchored. The high external current account deficit declined slightly despite lower commodity prices and sluggish external demand. A strong policy framework and solid fundamentals allowed the authorities to loosen the macroeconomic policy stance. The authorities embarked on a series of fiscal and structural packages, including tax cuts, increases in fiscal spending, and structural measures to support investment, consumption, and growth. Monetary conditions were also eased against a widening negative output gap and stable inflation expectations, helping to lower lending rates and providing support to credit to the private sector. New de-dollarization measures were launched at the end of 2014. Real GDP is projected to expand at about 3.75 percent this year, contingent on the reversal of last year’s supply shocks and policy stimulus. Growth is expected to rise in 2016−17, assuming new mines come on stream, large infrastructure projects are implemented, and terms of trade shocks fade, with the output gap closing by 2018. Inflation is projected to converge towards the mid-point of the target range by end-2015, and the current account deficit will narrow gradually over the medium term as mining exports gain ground.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

International Monetary Fund Washington, D.C. 20431 USA

2

Important risks loom on the horizon, but ample buffers place Peru in a comfortable position to respond to future shocks. Executive Board Assessment2 Executive Director commended the authorities for the country’s solid macroeconomic policies and fundamentals and visible gains in poverty reduction, which have made Peru one of the best performing economies in Latin America. While noting that risks to the outlook are tilted to the downside, Directors considered that Peru is in a comfortable position to respond to shocks, given the ample buffers in place. They concurred that if negative shocks materialize, exchange rate flexibility should be the main line of defense, and liquidity could be provided to avoid an undue contraction in credit, while acknowledging that Peru’s dollarized economy increases the risks from exchange rate volatility. Looking ahead, Directors encouraged the authorities to continue to implement ambitious structural reforms to sustain inclusive growth and diversify the economy, including through further de-dollarization. Directors agreed that the 2015 fiscal stimulus was timely, and concurred that the immediate priority is executing the existing package with a focus on boosting investment, rather than developing new measures. Directors welcomed the authorities’ intention to gradually withdraw the stimulus from 2016. They encouraged the authorities to implement careful expenditure management and revenue mobilization to return to the original fiscal path by 2018. Directors emphasized that hikes in non-priority current spending should be avoided, given the need to finance structural reforms, carry through the civil service reform, increase allocations for physical and human capital investment, and protect social programs. They agreed that, over the medium term, targeting a small structural fiscal surplus would be advisable to preserve buffers. Continued strong political commitment remains essential to maintain the credibility of the new fiscal framework. Directors supported the accommodative monetary policy stance that has kept inflation expectations well anchored. Looking ahead, they concurred that monetary policy should remain responsive to inflation expectations and external developments, while limited foreign exchange rate intervention could be necessary to smooth excessive volatility in a still highly dollarized economy. Directors welcomed the new de-dollarization measures. They agreed that strengthening prudential requirements on dollar lending and encouraging the private sector to hedge its foreign currency exposure could further support the de-dollarization process, along with deepening financial and capital markets. Directors supported enhancing data collection and

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

3

analysis of corporate and household balance sheets to better assess risks from currency mismatches. Directors observed that the financial system remains stable, although the recent deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close monitoring and supervision. A more effective use of existing programs to support small and medium-sized enterprises could help mitigate the impact of the growth slowdown. Directors underscored the importance of steadfast implementation of structural reforms to boost potential growth and foster social inclusion. They welcomed the authorities’ priority on streamlining legal requirements and red tape. Directors concurred on the need to pursue ambitious education reform and inclusion polices within the framework of fiscal discipline.

4

Peru: Selected Economic Indicators Prel. Projections 2010 2011 2012 2013 2014 2015 2016

Social Indicators Life expectancy at birth (years) 73.9 74.2 74.5 ... … … ... Infant mortality (per thousand live births) 15.2 14.3 13.6 12.9 … … ... Adult literacy rate 89.6 ... 93.8 ... … … ... Poverty rate (total) 30.8 27.8 25.8 23.9 22.7 … ... Unemployment rate 7.9 7.7 6.8 5.9 5.9 ... ... (Annual percentage change; unless otherwise indicated)

Production and prices Real GDP 8.5 6.5 6.0 5.8 2.4 3.8 5.0 Real domestic demand 14.9 7.7 7.4 7.4 2.0 3.8 4.2 Consumer Prices (end of period) 2.1 4.7 2.6 2.9 3.2 2.2 2.0 Consumer Prices (period average) 1.5 3.4 3.7 2.8 3.2 2.5 2.0 External sector Exports 32.3 29.5 2.2 -9.6 -7.8 -9.9 7.9 Imports 37.1 28.9 10.7 2.7 -3.4 -5.6 5.7 Terms of trade (deterioration -) 21.0 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 Real effective exchange rate (depreciation -) 2.1 -1.4 8.1 -0.2 -1.5 ... ... Money and credit 1/ 2/ Broad money 21.7 15.1 12.1 14.8 8.4 13.6 13.5 Net credit to the private sector 16.7 21.6 13.3 18.4 13.5 13.6 13.5

(In percent of GDP; unless otherwise indicated) Public sector NFPS Revenue 26.0 27.2 27.6 27.8 27.5 25.9 26.1 NFPS Primary Expenditure 25.0 23.9 24.3 25.8 26.6 26.8 26.7 NFPS Primary Balance 1.0 3.2 3.3 2.0 0.9 -0.9 -0.6 NFPS Overall Balance -0.2 2.0 2.3 0.9 -0.2 -2.0 -1.7 External Sector External current account balance -2.4 -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 Gross reserves In millions of U.S. dollars 44,150 48,859 64,049 65,710 62,353 61,353 61,553 Percent of short-term external debt 3/ 342 559 494 539 514 449 507 Percent of foreign currency deposits at banks 241 228 301 275 262 259 245 Debt Total external debt 27.2 25.6 27.2 27.4 30.2 32.5 31.6 NFPS Gross debt (including Repayment Certificates) 25.4 23.0 21.2 20.3 20.7 21.5 22.3 External 13.2 11.4 9.8 8.8 8.7 8.8 8.8 Domestic 12.2 11.6 11.4 11.5 12.0 12.7 13.5 Savings and investment Gross domestic investment 25.2 25.7 26.2 28.2 26.8 26.6 26.1 Public sector 4/ 5.9 4.8 5.4 5.8 5.5 5.8 5.8 Private sector 19.2 19.2 20.4 20.8 20.3 19.9 19.7 National savings 22.8 23.9 23.5 24.0 22.8 22.1 21.9 Public sector 5/ 6.3 7.4 8.0 7.1 5.6 4.0 4.4 Private sector 16.5 16.4 15.5 16.9 17.2 18.0 17.5 Memorandum items Nominal GDP (S/. billions) 419.7 469.9 508.3 546.9 576.1 608.9 647.3 GDP per capita (in US$) 5,027 5,685 6,324 6,540 6,458 5,962 6,242

Sources: National Authorities; UNDP Human Development Indicators; and IMF staff estimates/projections. 1/ Corresponds to depository corporations. 2/ Foreign currency stocks are valued at end-of-period exchange rates. 3/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt. 4/ Includes Repayment Certificates (CRPAOs). 5/ Excludes privatization receipts.

PERU STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION

KEY ISSUES

Context: Peru remains one of the best performing economies in Latin America, with

solid macroeconomic fundamentals, strong policy frameworks, and visible gains in

poverty reduction. Like most of the region, Peru faced a challenging external

environment in 2014. External shocks were compounded by domestic supply disruptions

and a drop in subnational public investment, and growth decelerated sharply. Headline

inflation was slightly above the upper band of the central bank’s (BCRP) target range due

to supply shocks, but expectations remained well anchored. The external current account

deficit declined slightly despite weaker external conditions.

Outlook and risks: Growth is expected to recover in 2015 and over the medium term,

contingent on production at new mines approaching capacity, priority infrastructure

projects advancing, and shocks to terms of trade fading. However, downside risks

dominate. Externally, these include a surge in global financial volatility, further dollar

appreciation, or lower commodity prices and external demand. Domestic downside risks

include weaker investment, uncertainties surrounding 2016 Presidential elections, and

persistent social conflicts. A faster unwinding of supply shocks or a more complete pass-

through of lower food and fuel global prices constitute upside risks.

Near-term policy mix: The policy mix is broadly adequate to support the recovery and

maintain macroeconomic stability. The immediate priority is expediting the execution of

public investment in line with government plans, while avoiding increases in non-priority

current spending. Monetary policy should remain responsive to inflation expectations

and external developments. Exchange rate flexibility should be the main line of defense

against any additional external pressures. The timely use of macro-prudential tools and

ongoing de-dollarization efforts should further solidify financial stability.

Medium-term prospects: With the end of the commodity boom, a push to deepen

structural reforms will be necessary to sustain potential growth and diversify the

economy. Revenue losses would need to be offset to finance structural reforms,

investment, and inclusion along a gradual fiscal consolidation path. Streamlining legal

requirements and red tape is rightly a government reform priority and the ambitious

education reform and inclusion polices should stay their course within the framework of

fiscal discipline. Persevering with labor market reform remains important.

May 5, 2015

PERU

2 INTERNATIONAL MONETARY FUND

Approved By A. Cheasty and

L. Cubeddu

Discussions took place in Lima during March 12–25, 2015. The team

comprised: A. Corbacho (Head), F. Lipinsky, K. Ross, M. Tashu, and

S. Vtyurina (all WHD). A. Santos (Senior Resident Representative)

assisted the mission and Z. Leal provided research assistance at

headquarters. Oscar Hendrick (Alternate Executive Director)

participated in the discussions. A. Cheasty (Deputy Director, WHD)

joined the concluding meetings with Economy and Finance

Minister Segura and Central Bank President Velarde.

CONTEXT ________________________________________________________________________________________ 4

OUTLOOK AND RISKS ___________________________________________________________________________ 6

POLICY DISCUSSIONS __________________________________________________________________________ 10

A. Securing the Recovery ________________________________________________________________________ 10

B. Solidifying Financial Stability __________________________________________________________________ 12

C. Unlocking Growth Potential ___________________________________________________________________ 13

STAFF APPRAISAL ______________________________________________________________________________ 14

BOXES

1. Fiscal and Structural Measures to Stimulate Growth and Investment __________________________ 16

2. Measures to Foster De-Dollarization __________________________________________________________ 17

3. Reassessing Potential Growth After the Investment Boom ____________________________________ 19

FIGURES

1. Real Sector Developments ____________________________________________________________________ 20

2. Fiscal Sector Developments ___________________________________________________________________ 21

3. External Sector Developments ________________________________________________________________ 22

4. FX and Capital Market Developments _________________________________________________________ 23

5. Financial Sector Developments ________________________________________________________________ 24

6. Balance Sheet Indicators ______________________________________________________________________ 25

7. Public Sector Debt Sustainability Analysis—Composition of Public Debt and Alternative

Scenarios _____________________________________________________________________________________ 36

8. External Debt Sustainability: Bound Tests _____________________________________________________ 38

CONTENTS

PERU

INTERNATIONAL MONETARY FUND 3

TABLES

1. Selected Economic Indicators _________________________________________________________________ 26

2. Nonfinancial Public Sector Main Fiscal Aggregates ___________________________________________ 27

3. Statement of Operations of the General Government _________________________________________ 28

4. General Government Stock Positions _________________________________________________________ 29

7. Financial Soundness Indicators ________________________________________________________________ 32

8. Financial and External Vulnerability Indicators ________________________________________________ 33

9. Medium-Term Macroeconomic Framework ___________________________________________________ 34

10. Public Sector Debt Sustainability Analysis (DSA)―Baseline Scenario _________________________ 35

11. External Debt Sustainability Framework, 2013–2020 _________________________________________ 37

APPENDICES

I. Social and Financial Inclusion __________________________________________________________________ 39

II. External Assessment __________________________________________________________________________ 42

III. New Fiscal Rules and Implications for Savings ________________________________________________ 46

IV. Macro-Financial Stability Assessment ________________________________________________________ 49

PERU


CONTEXT

1. Peru achieved impressive macroeconomic outcomes over the last decade. During

2003−13, growth averaged 6.2 percent, among the highest in Latin America, and inflation was

2.9 percent, the lowest in the region. Over this period, gross public debt fell by more than half to

20 percent of GDP and net debt dropped to 5 percent of GDP. These exceptional outcomes were

achieved through prudent macroeconomic management of the commodity boom, anchored by a

strong policy framework and a far-reaching structural reform agenda. The economy recovered

quickly from the 2008–09 global financial crisis. Accommodative macroeconomic policies played an

instrumental role and were smoothly unwound as growth accelerated.

2. Poverty reduction and inclusion strategies have had visible results. Poverty in Peru has

persistently declined throughout the last decade, from 59 percent in 2004 to 23 percent in 2014.

Extreme poverty had an even more striking drop and income distribution improved. These results

stand out in the region, where poverty reduction has stagnated more recently given weaker growth.

The government has expanded the social safety net and embarked on multifaceted education and

financial inclusion reforms to improve living standards and alleviate social tensions, with

redistributive policies estimated to account for about half of poverty reduction since the mid-1990s

(Appendix I).

3. Like most of the region, Peru faced a challenging external environment in 2014 and

growth slowed markedly. A renewed slide in global metal prices and continued moderation in the

growth of China (Peru’s main trading partner) were a major drag on private investment and exports.

External shocks were compounded by an unexpected drop in sub-national public investment due to

implementation problems and temporary supply disruptions in fishing, mining, and agriculture.

Against this background, growth decelerated to 2.4 percent in 2014, from 5.8 percent a year earlier.

The current account deficit narrowed slightly to 4.0 percent of GDP, despite a further deterioration

in the terms of trade, and international reserves fell as capital inflows were insufficient to cover the

current account deficit. With weaker economic activity, labor market conditions softened towards

the end of 2014.

4. In mid-2014, the authorities announced a

series of packages to stimulate the economy.

Measures included one-off bonuses, streamlined

investment processes, and permanent cuts in income

taxes (Box 1). Part of the package was executed in 2014,

resulting in a fiscal deficit and a fiscal impulse of about ¼

percent of GDP. Strong tax collection and one-off

revenue gains compensated for declining mining

revenues.1 Current expenditure continued to rise, partly

1 A change in ownership of private commodity companies contributed ½ percent of GDP in capital gains tax revenue.

-5

0

5

10

15

20

25

Current

expenditure

Capital

expenditure

Primary

balance

Overall

balance

Impulse

2011 2012 2013 2014

Sources: Ministry of Finance and Fund staff estimates.

Peru: Fiscal Accounts

(In percent of GDP)

PERU


related to wage increases under the civil service reform,2 while capital expenditure fell. Peru took

advantage of favorable financing conditions and placed US$500 million in 36-year global bonds in

2014. Moody’s raised Peru’s rating to A3 (at par with Mexico), while S&P and Fitch rated Peru BBB+.

5. Monetary policy was eased against a widening negative output gap and stable

inflation expectations. Headline inflation hovered above the 3 percent upper limit of the target

band in 2014 and early 2015 due to high food prices and some pass-through from the depreciation

of the nuevo sol. However, inflation excluding food and fuel and expectations remained within the

band. Between November 2013 and January 2015,

the BCRP lowered its policy rate by a cumulative

100 basis points to 3¼ percent. The BCRP also

lowered reserve requirements on local currency

deposits by a cumulative 23 percentage points to

7 percent between August 2013 and May 2015.

These measures helped to support a robust, albeit

slowing, growth of credit to the private sector of

9½ percent (yoy in FX-adjusted terms) in February

2015.3 New de-dollarization measures were launched

at the end of 2014 (Box 2).

6. The exchange rate depreciated amid

intervention. During 2014, the BCRP intervened in

the spot and forward markets, which led to a fall in

NIR of US$3½ billion to US$62½ billion

(31 percent of GDP) at end-2014.4 Intervention

continued through the first quarter of 2015, with a

further loss in NIR of US$1 billion.5 Amid

intervention, the nuevo sol depreciated by

6½ percent in 2014 (yoy in nominal terms) and by

3 percent in the first quarter of 2015 (less than the

currencies of trading partners and competitors but

more than the inflation differential with the U.S.). The real exchange rate is assessed to be broadly in

line with fundamentals (Appendix II). The modest real exchange rate depreciation in 2014 corrected

2 One-off bonuses in the stimulus package accounted for ¼ percent of GDP in 2014.

3 Credit growth remained relatively robust despite the slowdown in private investment, in part reflecting the

substitution of external issuances with domestic bank credit.

4 The interventions are sterilized via repo operations to safeguard local-currency liquidity in the financial system.

5 FX intervention was larger than NIR losses partly because a sizable portion of the intervention was conducted

through FX swaps and sales of dollar-indexed securities. In 2014, FX intervention amounted to US$4.2 billion in the

spot market and US$14 billion in gross transactions in the forwards market.

80

100

120

140

160

180

200

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Brazil Chile Colombia Mexico Peru Uruguay

Source: Bloomberg.

Selected Latin American Countries: Exchange Rates

(US$/LC; Index Jan. 2008 =100)

0

1

2

3

4

5

6

7

8

9

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Corporate prime rate (90 days)

Policy rate

Source: Central Reserve Bank of Peru.

Peru: Interest Rates(In percent)

PERU


the mild overvaluation observed at end-2013 (IMF Country Report 14/21), as the equilibrium real

exchange rate remained relatively unchanged.

7. The financial system remained stable. The banking system remained profitable, liquid,

well capitalized, and with strong operational efficiency. Deposit-to-loan ratios declined in recent

years due to higher long-term financing from capital markets, but deposits continued to provide the

lion’s share of banks’ funding. Also, direct

exposure to the commodity sector appears

limited. Nevertheless, the quality of loans to

small- and medium-sized enterprises

deteriorated. The balance sheets of small non-

bank institutions, in particular cajas rurales,6 also

worsened as their portfolios concentrate on small

firms. Credit dollarization fell to 36 percent in

March 2015, from 70 percent a decade earlier, but

continues to be a vulnerability of the financial

sector.

8. In previous Article IV consultations, staff and the authorities broadly agreed on policy

issues. Fund technical assistance and staff analyses were an input for the fiscal framework launched

in the 2015 budget. The authorities are also implementing staff recommendations on public assets

and liabilities management and on capital market reform, with the aim of creating a special offering

regime for small-and medium-sized enterprises and reducing transaction costs in the stock market.

Several FSAP recommendations have been taken on board. There is broad agreement on the

structural reforms that are needed to boost potential growth. Finally, open communication remains

a core component of the policy dialogue with the authorities, who continue to publish the

concluding statement and the Staff Report and actively collaborate with staff on analytical projects.

Staff and the authorities are preparing a joint book on Peru and several outreach seminars ahead of

the 2015 IMF-World Bank Annual Meetings in Lima.

OUTLOOK AND RISKS

9. Growth in 2015 is expected to recover supported by domestic conditions. In staff’s

baseline scenario, real GDP is projected to expand at about 3¾ percent this year, on the assumption

that temporary supply shocks unwind. The recovery also critically hinges on executing the public

investment budget and the stimulus measures, with the 2015 fiscal deficit projected to rise to

2 percent of GDP. Inflation is expected to converge to the middle of the target band of 2 percent by

end-2015 as domestic supply shocks dissipate. The 2015 external current account deficit is projected

6 Cajas rurales constitute only 0.7 percent of assets of deposit taking institutions.

Dec-11 Dec-12 Dec-13 Dec-14

Banks 1.5 1.8 2.1 2.5

of which :

Medium enterprises 2.1 2.5 3.7 4.7

Small enterprises 4.7 5.3 7.3 8.8

Cajas Municipales 4.9 5.2 5.8 5.8

Empresas Financieras 3.5 4.5 5.2 5.6

Cajas Rurales 4.3 5.3 6.7 12.6

Average 1.8 2.2 2.6 2.9

Source: Superintendency of Banks, Pensions, and Insurance.

Peru: Non-Performing Loans of Financial Institutions

(In percent)

PERU


to remain elevated, given weak external conditions, but would be broadly financed by long-term

capital flows.7

10. Staff estimates medium-term growth in line with potential. Staff expects growth to rise

in 2016–17, assuming mines approach production capacity, planned public-private partnerships and

“Public Works in Lieu of Taxes” projects are implemented,8 and shocks to terms of trade fade, with

the output gap closing by 2018. For the medium term, staff estimates that potential growth may

have fallen to about 4½ percent (Box 3), given prospects of flat metal prices, moderating growth in

China, and relatively weaker investment.9 The current

account deficit is projected to narrow gradually to

3 percent of GDP by 2020 as mining exports gain

ground, with the external position assessed to be

broadly consistent with medium-term fundamentals

and desired policy settings (Appendix II). Fiscal

deficits are projected to continue, reflecting the

effect of the recent tax measures and the need to

invest in infrastructure and structural reforms; public

debt will rise slightly from still very low levels.

Monetary aggregates are projected to continue

growing faster than nominal GDP, consistent with

past trends and Peru’s relatively low level of financial

deepening.

11. Downside risks to the outlook dominate, but Peru is in a strong position to respond to

shocks.

Downside external risks include: a further slowdown in the growth of China; even lower terms of

trade; or a surge in global financial volatility. A surge in volatility triggered for instance by

surprises about the liftoff in U.S. interest rates could lead to a reversal of capital flows and

financial pressures on emerging markets, with knock on effects on commodity prices.

A persistent strengthening of the U.S. dollar is also a risk for Peru given dollarization.

Downside domestic risks include: weaker investment; uncertainty given the 2016 Presidential

elections; continuing social tensions in mining regions;10

and a stronger than expected impact

from El Niño weather phenomenon. Moreover, a slower pace of structural reforms could further

7 Profits of nonresident corporations account for a large part of the current account deficit, but are expected to be

mainly re-invested in Peru.

8 A private entity (usually a mining company) constructs a local public project in lieu of paying income taxes

equivalent to the cost of the project determined by the national investment system.

9 In staff’s baseline, mining investment and FDI are projected to decline given lower commodity prices over the

medium-term, partially compensated by the large infrastructure projects.

10 Conflicts have nearly tripled from 76 in 2006 to 211 by March 2015 (see Appendix I).

3.5

4.0

4.5

5.0

5.5

6.0

2015 2016 2017 2018 2019 2020

Potential Growth forecast

Peru: Medium-term and Potential Growth

(In percent)

Source: Fund staff estimates.

PERU


encumber potential growth. At the same time, a faster pick-up in production in primary sectors

entails upside risks. Further efforts to allow a more complete pass-through of lower global oil

and food prices to domestic prices would also help support economic activity.11

Outward spillover risks remain low.

12. The authorities concurred that the economy would return to a higher growth

trajectory in 2015 and the medium term, but project a somewhat faster recovery than staff.

The authorities were confident that supply disruptions in primary sectors would resolve in 2015

(contributing 1½ percentage points to growth), consumption would remain supportive, and

investment—both private and public—would rebound from last year’s dip. For 2015, the authorities

project growth of around 4 percent. For the medium term, they estimate higher potential growth of

5 percent, primarily based on a more favorable investment outlook than staff’s, especially linked to

infrastructure projects. There was agreement that structural reforms were critical to boost

competitiveness and productivity against less favorable external conditions over the medium term.

11

In March 2015, domestic food prices increased by 6.4 percent yoy, while international prices fell; and domestic fuel

prices declined by 16.8 percent, while international prices declined by 45 percent. The pass-through has been limited

given relatively weak local competition and price stabilization mechanisms. Nevertheless, Peru should benefit from

lower global oil prices in the long run, given a net oil deficit of ½ percent of GDP.

Prel.

2014 2015 2016 2017 2018 2019 2020

Real GDP growth (in percent) 2.4 3.8 5.0 5.5 4.8 4.5 4.5

Output gap (in percent of potential GDP) -1.0 -1.7 -1.2 -0.3 0.0 0.0 0.0

(In percentage points)

Contributions to growth

Private consumption 2.5 2.5 2.9 3.3 2.9 2.7 2.8

Private investment, incl. invent. -1.0 0.1 0.7 1.1 0.6 0.8 1.1

Exports -0.1 0.7 1.7 2.0 1.8 1.3 1.0

(Annual percentage change)

Inflation (eop) 1/ 3.2 2.2 2.0 2.0 2.0 2.0 2.0

Terms of trade (deterioration -) -5.4 -4.5 -0.8 0.4 0.3 0.2 0.6

(In percent of GDP)

National savings 22.8 22.1 21.9 22.3 22.4 22.3 22.4

Gross domestic investment 26.8 26.6 26.1 26.0 25.5 25.3 25.3

External current account -4.0 -4.5 -4.2 -3.7 -3.2 -3.1 -2.9

Fiscal balance 2/ -0.2 -2.0 -1.7 -1.4 -1.0 -1.0 -1.0

Structural balance 2/ 3/ 0.2 -1.3 -1.1 -1.2 -0.9 -0.9 -1.0

Structural primary balance 2/ 3/ 1.2 -0.2 0.0 0.0 0.3 0.2 0.0

Public debt 2/ 20.7 21.5 22.3 22.2 21.7 21.3 22.0

Sources: National Authorities and Fund staff estimates.

1/ Inflation target 1-3 percent.

2/ Nonfinancial Public Sector (including Repayment Certificates).

3/ Staff's methodology.

Proj.

Peru: Staff's Macroeconomic Framework

PERU


Peru: Risk Assessment Matrix 1/

Likelihood Impact Policy Advice 2/

Protracted period of weak

domestic demand and

confidence

H (H ↓) Lags in policy implementation

and slow structural reforms

coupled with the upcoming 2016

election uncertainties and a

prolongation of social conflicts

could affect investment,

consumption, and credit.

Implement the stimulus packages

and persevere with structural

reforms, especially those aimed at

increasing investment. Keep up

efforts to advance social inclusion.

Faster than expected increase

in mining and primary sectors'

production

L H (↑) Ongoing efforts to streamline

regulation in mining, together with

improvements in technology, could

substantially increase production

faster than expected.

A surge in global financial

volatility

H H (↓) Peru ’s risk premiums would

increase, there could be pressures

on the nuevo sol and capital

outflows. Yields could increase in

domestic bond markets together

with potential crowding out by

corporates of domestic private

credit. FDI flows could slow down,

which would affect growth outlook

as FDI was key to financing large

current account deficits and

fostering growth.

Exchange rate flexibility and use of

liquidity buffers. Persevere with

measures to further reduce financial

dollarization while smoothing the

effects on the balance sheets. Ease

reserve requirements to avoid a

credit squeeze. Unwind macro

prudential measures.

Protracted period of slower

growth in advanced and

emerging economies /Growth

slowdown and financial risks in

China

H/M M/ H (↓) Continuing slowdown in

global demand would lead to a

worsening current account deficit

and weaker growth, especially

through lower exports, both in

price and volume.

Exchange rate flexibility and use of

liquidity buffers. Ease monetary and

prudential policies. Accelerate

structural reforms.

Persistent dollar strength M M (↓) Balance sheet strains will

increase for dollar debtors.

Exchange rate flexibility, while

intervening to smooth excessive

volatility.

2/ Recommended by staff.

1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in

the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to

indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50

percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

Non-mutually exclusive risks may interact and materialize jointly.

Country-specific risks

External risks

PERU


POLICY DISCUSSIONS

A. Securing the Recovery

13. Within the constraints of a still weak external environment, staff assessed the policy

mix as broadly adequate to support the recovery and maintain macroeconomic stability. Tax

cuts, higher public spending, and accommodative monetary conditions should provide needed

stimulus to activity. Under the baseline scenario, growth is expected to improve in 2015, but the

negative output gap will close only gradually by 2018. The immediate priority is timely

implementation of the stimulus package (rather than additional fiscal measures), with a focus on

public investment. If negative shocks materialize, exchange rate flexibility should be the main line of

defense, liquidity could be provided to avoid an undue contraction in credit, and monetary

conditions could be eased if downside risks to inflation projections become evident.

14. In April, the authorities revised the 2015 fiscal deficit target as permitted by the

escape clauses to incorporate the stimulus package. They raised the overall fiscal deficit target to

2 percent of GDP, consistent with stimulus of 1½ percent of GDP and financed mainly through

domestic sources. The revised target exceeds the original indicative structural deficit target of 1

percent of GDP under the fiscal rule given lower taxes. It also incorporates an ambitious yet more

realistic public investment envelope and a re-prioritization of spending on operation and

maintenance. The authorities also outlined the exceptional economic circumstances for deviating

from the fiscal rule and a gradual consolidation plan starting in 2016. They underscored that fiscal

consolidation should commence in 2016 as growth gained speed, but noted that the incoming

administration would need to determine the fiscal path for 2017 and beyond as required by the new

fiscal framework. They also indicated that the Fiscal Council will be established in 2015.

15. Staff agreed that the sharp slowdown in growth warranted a fiscal stimulus that

should be gradually withdrawn from 2016 onwards. Staff concurred that the adoption of the

revised target along with the adjustment path was an important signal of commitment to fiscal

sustainability and would help maintain the credibility of the fiscal framework. Staff also noted that

the early formulation of high quality measures could further enhance the credibility of the fiscal

adjustment path. For the medium term, staff reiterated its previous recommendation to target a

small structural fiscal surplus of around ½ percent of GDP to preserve buffers in the face of

commodity shocks, contingent liabilities, and natural disaster risks (Appendix III).

16. The authorities remain committed to stepping up public investment execution, given

its higher effectiveness in stimulating growth in the short and the long run. They initiated

several actions to strengthen investment execution capacity and to capitalize on private sector

expertise through joint infrastructure projects. Staff recommended embedding public-private

partnerships in the medium- and long-term budget planning and debt sustainability analysis to

ensure that commitments remain manageable and contingent liabilities and risks are transparently

reported. On the “Public Works in Lieu of Taxes” projects, staff recognized that they could offer a

pragmatic solution in current circumstances to deliver on infrastructure needs at the sub-national

PERU


level, but advised that they be monitored closely adhering to high transparency standards.

The authorities agreed that hikes in non-priority current spending should be avoided and explained

that the new fiscal path had taken into consideration the need to close a wide infrastructure gap and

persevere with structural reforms to increase long-term growth.

17. The authorities recognized that the recent erosion of tax revenues would need to be

offset over the medium term to support investment and inclusion along a consolidation path.

They noted that the cut in corporate income taxes had aligned rates in Peru with the rest of the

region and would support private investment and growth. However, staff emphasized the tax cuts

had amplified the existing tax collection gap, both with respect to peers and to the tax effort

expected for Peru’s level of development, at a time when commodity fiscal revenues were declining.

The authorities agreed that compensatory measures should unwind the revenue losses and aim to

enhance the equity and efficiency of the tax system by widening the tax base, streamlining

exemptions, promoting formalization, boosting the collection of local property taxes, and reviewing

excise taxes to address negative externalities. Staff welcomed the important efforts made by the

revenue administration to transition towards a client-based institution and support revenue goals.

18. There was broad agreement that monetary policy should remain responsive to

inflation expectations and external developments. Staff acknowledged that monetary policy

continued to respond effectively to changing conditions, while expectations remained well

anchored. Staff highlighted that a widening negative output gap and a more complete pass-through

of low commodity prices could create some space for monetary policy. At the same time, the room

for further easing could be constrained by pressure in the FX market in the context of the

anticipated U.S. monetary policy normalization. The BCRP noted that under the baseline scenario the

rise in U.S. interest rates would proceed gradually, with near-term constraints to monetary policy in

Peru likely to be limited. Liquidity buffers and reserves would allow the authorities to manage a

potential surge in global financial volatility.

19. Staff emphasized that exchange rate flexibility should be the main line of defense

against downside external risks.12

Exchange rate flexibility would help cushion any additional

pressures from further declines in commodity prices and the expected normalization of U.S.

monetary policy. It would also support the authorities’ de-dollarization agenda by creating

incentives for deepening markets for FX derivatives as the private sector appropriately internalizes

the costs of un-hedged FX exposures. Staff also advised the authorities to consider the case for

regulations on foreign currency exposure of pension funds, as these are large market players.

20. The authorities reiterated their commitment to exchange rate flexibility, but

underscored the need to contain excessive volatility in a still dollarized economy. They

stressed that financial dollarization posed risks to balance sheets; FX intervention aimed to contain

these risks without targeting any level or path for the exchange rate. The authorities also noted that

12

Peru does not maintain exchange restrictions or multiple currency practices subject to Fund jurisdiction

(under Article VIII, Section 2 (a) or 3) and has an open capital account.

PERU


the costs of FX intervention through FX swaps had been negligible, in particular compared to the

gains from valuation changes in NIR due to the depreciation of the nuevo sol.

B. Solidifying Financial Stability

21. The authorities concurred that the financial system remained stable, with no evidence

of imminent systemic risks (Appendix IV). They noted that financial institutions with worsening

balance sheets such as cajas rurales were a small share of the financial system and held sufficient

loss-absorbing capital of 14¾ percent at end-2014. Moreover, the authorities’ stress tests showed

that the financial system would remain resilient to tail risks of weak economic activity and large

exchange rate depreciation. The authorities also underlined that the legal framework for bank

resolution was in line with best practices and that they continue to strengthen supervisory and

regulatory standards in line with FSAP recommendations and Basel III principles.

22. Staff welcomed the new de-dollarization measures. Given heightened market volatility

and weak economic activity, staff cautioned that financial market developments would need to be

followed closely and the de-dollarization measures implemented flexibly to ensure a smooth flow of

credit and avoid liquidity-maturity mismatches. Staff also discussed other de-dollarization options,

such as a strengthening of prudential requirements on dollar lending to un-hedged borrowers by

the bank supervisor, which could be effective in addressing FX risk without undue pressure on dollar

deposits and covered dollar loans.13

In this regard, improving data collection and analysis of private

sector balance sheets would allow a better assessment of systemic risks from currency mismatches

and inform any need for additional targeted macro-prudential tools.

23. Staff also emphasized that deepening financial and capital markets would help

de-dollarization efforts. Despite recent progress, Peru’s capital market remains underdeveloped by

regional standards. For instance, the average turnover ratio for secondary bond markets was

½ percent in 2014, compared to 56 percent in Chile, and the share of transactions in FX derivatives

in the FX market was very low compared to the average for emerging economies (Box 2). Recent IMF

technical assistance suggested that developing a deeper and more liquid money market, easing

restrictions on the use of derivatives by pension funds, and building the capacity of supervisory staff

would help address remaining structural and regulatory constraints.

24. The authorities broadly agreed with staff’s views on the de-dollarization measures.

They did not see a material risk of capital outflows due to higher reserve requirements on dollar

deposits. They noted that the largest dollar depositors were pension funds, which were subject to a

binding prudential limit on investment abroad. Commercial banks agreed with the authorities’ view

that the risk of capital outflows due to the new measures was limited and welcomed the

coordinating role of the BCRP in moving towards lower credit dollarization. The authorities

13

Although credit dollarization amounts to 36 percent, estimates by the Superintendence of Banks, Insurance, and

Pension Funds (SBS) show that only 13 percent of total credit (5 percent of GDP) is exposed to FX credit risk.

PERU


concurred on the need to deepen financial and capital markets and noted ongoing efforts in line

with IMF technical assistance.

C. Unlocking Growth Potential

25. Past structural reforms set the stage for the investment and growth boom of the last

decade. Deep seated reforms in the pre-commodity boom period allowed the country to take

advantage of the favorable external environment and improve productivity. However, reform

implementation slowed more recently,

resulting in some stagnation or weakening in

international competitiveness rankings. For

example, Peru fell from 61st to 65

th place in the

Global Competitiveness Ranking, given still

weak human capital, labor market rigidities,

and relatively low institutional capacity. Doing

Business indicators have ticked up slightly,

though methodological changes make

comparisons over time difficult.

26. With the end of the super

commodity cycle, structural reforms are

needed to boost growth potential and

advance social inclusion. One overriding

challenge is high informality, which limits

firm size, human capital development,

innovation, and financial deepening—all of

which constrain productivity. Labor market

rigidities, as reflected in legally-mandated

high non-salary compensation compared to

the region, are one example of barriers to

formality that negatively impact

competitiveness. Another important impediment, evident through the growth slowdown of last year,

is bureaucratic red tape, or tramitologia, which increases costs and hampers investment.

27. The authorities’ broad-based structural reform agenda tackles important challenges.

Staff noted that the ambitious education reform and inclusion polices were already showing

noteworthy results and should stay their course within the framework of fiscal discipline. Ongoing

efforts to reform the civil service, streamline permit procedures, strengthen public enterprise

governance, simplify public investment processes, enhance innovation, and diversify exports were

also steps in the right direction. Finally, the OECD Country Program with Peru could provide a useful

0

20

40

60

80

100

CH

L

UR

Y

MEX

BR

A

CO

L

PER

CH

L

UR

Y

BR

A

MEX

CO

L

PER

UR

Y

CH

L

CO

L

MEX

BR

A

PER

MEX

BR

A

UR

Y

PER

CO

L

CH

L

Public Institutions,

(WEF)

Quality of Primary

Education

(WEF)

Infrastructure,

2nd pillar

(WEF)

Structural Performance Indicators 1/

(Percentile ranks)

Sources: World Economic Forum (WEF); and Export Diversification Database, IMF, 2010.1/ The scale reflects the percentile distribution across all countries in the respective survey; higher scores reflect higher performance.

Export

Diversification

(IMF)

Chile Mexico Colombia Peru

Contributions and taxes 25.2 31.5 36.8 27.0

Vacations 4.2 1.7 4.2 8.3

Bonus/extra payments 0.0 0.0 4.2 16.7

Firing costs 2.3 3.2 8.3 7.0

Total non-salary labor costs 31.7 36.4 53.5 59.0

Memorandum item:

Minimum salary/GDP per capita 0.30 0.15 0.41 0.46

Sources: World Bank DB 2014 and International Labor Organization.

Selected Latin American Countries: Non-Salary Labor Costs

(In percent of salaries)

PERU


new platform for designing reforms and strengthening policies.14

Staff also emphasized the

importance of persevering with labor market reform, focusing on reducing non-wage costs and

streamlining work rules. Strong across-the-board political commitment remained essential for

fostering reform efforts in the short and medium term.

STAFF APPRAISAL

28. Peru remains one of the best performing economies in Latin America, with solid

macroeconomic policies and visible gains in poverty reduction. Challenging external conditions,

coupled with domestic supply shocks, were an important drag on economic activity in 2014. In the

face of a widening negative output gap, loosening the macroeconomic policy stance was

appropriate. Growth is expected to recover in 2015 and over the medium-term, contingent on

production at new mines approaching capacity, priority infrastructure projects proceeding according

to plan, and external shocks fading.

29. Important risks loom on the horizon, but strong policy frameworks and fundamentals

place Peru in a comfortable position to respond to future shocks. The external environment is

expected to continue to pose downside risks, from further slowdown in China, lower terms of trade,

or a surge in global financial volatility. Weak investment confidence and uncertainty given upcoming

elections may also entail downside domestic risks. On the other hand, a faster unwinding of last

year’s supply shocks or a more complete pass-through of lower global prices are upside risks. If

negative shocks materialize, exchange rate flexibility should be the main line of defense, liquidity

could be provided to avoid an undue contraction in credit, and monetary conditions could be eased

if downside risks to inflation projections become evident. While fiscal buffers are ample, the

immediate priority is to follow through with the approved investment envelope rather than consider

additional fiscal measures.

30. The 2015 fiscal stimulus was timely but should be gradually withdrawn. Careful

expenditure management and revenue mobilization will be essential to return to the original fiscal

path by 2018, while attending to social and infrastructure needs. Hikes in non-priority current

spending should be avoided, given the need to finance structural reforms, carry through the civil

service reform, increase allocations for physical and human capital investment, and protect social

programs. Over the medium term, it would be advisable to target a small structural fiscal surplus of

½ percent of GDP to preserve buffers in light of commodity shocks, natural disaster risks, and

contingent liabilities. Continued strong political commitment to the new fiscal framework is essential

to maintain its credibility.

31. Monetary policy has been adequately accommodative. Inflation excluding food and fuel

has stayed within the band and expectations remain well anchored. Looking ahead, monetary policy

should continue to respond to changes in inflation expectations and external developments.

14

Program discussions will take place over the next two years, reviewing best practices in 18 key public policy areas.

PERU


Exchange rate flexibility will be key to cushion any additional external pressures, while limited

foreign exchange intervention may be necessary to smooth excessive volatility that could lead to

disorderly market conditions and undermine macro-financial stability.

32. The new de-dollarization measures will help address a key structural vulnerability of

the financial system. However, financial market developments will need to be monitored closely

and the de-dollarization measures implemented flexibly to ensure a smooth flow of credit.

Strengthening prudential requirements on dollar lending to un-hedged borrowers and improving

data and analysis of private sector balance sheets could prove helpful in this process. Exchange rate

flexibility would support de-dollarization by appropriately encouraging the private sector to hedge

its foreign currency exposures. Deepening financial and capital markets should also be an important

component of the de-dollarization agenda.

33. Despite weaker economic conditions, the financial system remains stable. The recent

deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close

monitoring and supervision. While these institutions are small and non-systemic, they serve a large

number of relatively vulnerable clients. More effective use of existing programs to support small and

medium-size enterprises could help mitigate the impact of the growth slowdown and the softening

of labor market conditions. Balance sheet information for medium and small firms and households

should be collected to better assess risks from currency mismatches.

34. Structural reforms are critical to boost growth potential and advance social inclusion.

The continued slide in metal prices, the moderation of growth in China, and the decline in

investment suggest that potential growth may have fallen from the heights of the last decade.

Boosting potential growth requires steadfast implementation of structural reforms to enhance

productivity, investment, human capital, and formal employment. Streamlining legal requirements

and red tape is rightly a reform priority of the government and the ambitious education reform and

inclusion polices should stay their course within the framework of fiscal discipline. Persevering with

labor market reform remains a challenge.

35. It is proposed that the next Article IV Consultation with Peru take place on the

standard 12-month cycle.

PERU


Box 1. Peru: Fiscal and Structural Measures to Stimulate Growth and Investment1

In mid-2014, the authorities announced a series of stimulus packages with a total net cost of about 2

percent of GDP. About a ¼ percent of GDP was spent in 2014,2 with the rest of the measures planned for

2015. Some structural measures are awaiting approval by congress.

On the revenue side, the authorities estimate the

tax cuts would result in a revenue loss of about

0.7 percent of GDP in 2015. The personal income

tax rate was cut for the lowest income segment

from 15 to 8 percent. The corporate tax rate will

decline gradually from 30 to 26 percent over the

next four years, while the dividend tax will

increase for payments to non-residents. A

gradual elimination of VAT withholding schemes,

which were deemed to negatively affect the

liquidity of small firms, and a gradual reduction

of the drawback mechanism seen as an export

subsidy, were also adopted. Changes were also

introduced to the temporary tax on net assets

and to the General Sales Tax, along with other

amendments to the Tax Code.3

On the regulatory side, speeding up investment is mostly targeted at streamlining requirements for both

public and private investment. For example: (i) the maximum time for registrations, amendments and

registration renewals required for large-scale investment projects will be reduced by 25 percent; (ii) changes

in the approval of archeological certificates is expected to reduce discretion and add predictability to

investments; (iii) a tax benefit and the accelerated depreciation benefit for hydroelectricity generation will be

extended until 2025, targeting investment of US$3 billion; (iv) an increase in the depreciation rate from 5 to

20 percent was introduced to spur housing construction; and (v) the percentage of mining revenues that

may be used for infrastructure maintenance was increased from 20 to 40 percent.

Other measures include:

Expedited land expropriation for infrastructure projects.

Greater funding and subsidies to encourage productivity in the small business sector.

More direct contracting between public sector and suppliers and between the Peruvian and foreign

states in all sectors.

Standardized requirements for public procurement and prevention of price collusion.

Fiscal multipliers of expenditure and revenue measures on growth depend on various factors, including the

economic cycle and structural characteristics. According to BCRP (Inflation Report, 2012), tax cuts have small

multipliers in Peru due to changes in the propensity to consume. The largest bang for the nuevo sol during

downturns comes from increasing capital spending, with a multiplier of ½–1½ in the short and medium

terms, while current spending has a multiplier of ¼–1. IMF Working Paper 14/93 calculates a short-term

multiplier of about ½ for middle income emerging economies like Peru. For 2015, staff estimates the

contribution of the fiscal measures to GDP growth at about ½ percentage point.

____________________________________

1 Prepared by S. Vtyurina. 2 In net terms. 3 A staff Selected Issues paper discusses Peru’s tax system and recent reforms.

A. Taxes (2015) 0.7

B. Net expenditure (2014) 0.3

Bonuses and salary increases 0.3

C. Expenditure (2015) 0.9

Current expenditure 0.1

Capital expenditure 0.4

Repayment of debt in arrears 0.3

Social assistance 0.1

Total (A+B+C) 1.9

Sources: National authorities and Fund staff estimates.

Peru: Fiscal Measures

(In percent of GDP)

PERU


Box 2. Peru: Measures to Foster De-Dollarization1

Instability and hyperinflation during the 1970–80s resulted in financial dollarization of about 80 percent of

credits and deposits by the end of the 1990s. The process of de-dollarization began in the early 2000s and is

still ongoing at a steady pace, following policy initiatives that included:

An inflation targeting framework, which anchored inflation to the level of advanced economies.

Prudential measures, including differential reserve requirements on local currency versus foreign currency

deposits and additional provisioning, liquidity, and capital requirements for FX loans. Based on the Fund’s

institutional view on the liberalization and management of capital flows, the marginal reserve

requirement on local currency short-term deposits of some non-resident financial entities is assessed as a

capital flow management measure. In December 2014, the reserve requirement ratios were equalized

across all types of local currency deposits.

Development of capital markets in local currency and the de-dollarization of public debt.

Despite significant progress, 38 percent of credit and 43 percent of deposits were still denominated in U.S.

dollars at end-2014. Similarly, about 40 percent of transactions (estimated by payments and withdrawals

from the banking system) were conducted in U.S. dollars. Financial and transactional dollarization is

particularly high in the corporate sector. About 60 percent of credits to the corporate sector were

denominated in U.S. dollars at end-2014 and a 2013 Survey by the BCRP shows that about 58 percent of the

value of transactions in inputs/supplies among firms was denominated in U.S. dollars.

In December 2014, the BCRP introduced a new set of measures aimed at the de-dollarization of credit:

New Repos in nuevo soles to support the growth of credit in local currency and to encourage the

substitution of foreign currency loans with local currency loans. In the first case (expansion), financial

institutions can conduct Repos in local currency with the BCRP up to the equivalent of 10 percent of their

required foreign currency reserves, using these reserves as collateral, to expand new credits in local

currency (Figure a). In the second case (substitution), financial institutions can access liquidity in local

currency from the BCRP if they want to convert their foreign currency loans (assets) into local currency

loans (Figure b).

Figure a. Repo to support expansion of credit in nuevo soles

Figure b. Repo to substitute foreign currency loans with local currency loans

_________________________________

1/ Prepared by M. Tashu.

Receives nuevo soles

BCRP Commercial

bank

Grants US$ from its RRs as collateral

BCRP Commercial

bank

Repo nuevo soles

US$ deposits for Repo

operation

Client

Borrows in nuevo soles

Repays US$ loans

PERU


Box 2. Peru: Measures to Foster De-Dollarization (concluded)

Higher reserve requirements on foreign currency deposits. The marginal reserve requirement on

foreign currency deposits was increased by 10 percentage points effective in January and by

another 10 percentage points effective in March, 2015 to 70 percent. In addition, reserve

requirements on foreign currency deposits will be increased for financial institutions that do not

meet certain de-dollarization targets for credits excluding foreign trade and long-term investment

financing. Specifically, financial institutions that do not reduce the balance of their foreign-currency

loans by 5 percent (by June 2015) or by 10 percent (by December 2015), compared to the balance in

September 2013, will face additional reserve requirements on foreign currency deposits. Additional

reserve requirements will apply on dollar deposits if mortgage and vehicle credits in foreign

currency do not fall by more than 10 percent by June and 15 percent by December 2015, compared

to levels in February 2013.

While these measures could reduce dollarization incrementally, experience shows that deepening financial

and capital markets is an effective way to achieve lasting de-dollarization. For instance, Israel’s and Poland’s

success in de-dollarization is associated with an active policy of de-dollarizing public debt, deepening the

local-currency bond market, and promoting the development of markets for FX derivatives along with

increased FX flexibility. Deep and liquid bond markets in local currency provide alternative investment

vehicles to dollar deposits. Also, advanced financial markets with opportunities for hedging instruments and

indexed local bonds can reduce the need for foreign currency to hedge against FX risks.

In Peru, efforts to develop the local capital market have

helped to increase the share of local currency debt to

total public debt, from 10 percent in 2004 to over 50

percent in 2013, and extend the average duration of

local currency debt, from 4 years to 8 years. However,

important weaknesses remain. The secondary market

for bonds remains thin and illiquid, with an average

turnover ratio of about 0.4 percent in 2014, compared

to about 56 percent in Chile. Also, FX trading in Peru is

dominated by spot transactions; the share of

transactions in FX derivatives is the lowest among

regional peers and very low compared to the average

for emerging economies. Recent initiatives, including

new regulations on repo markets, improving the safety of the securities clearing and settlement systems,

and creating a reference rate (interbank overnight rate) based on effective transactions are welcome steps.

0

10

20

30

40

50

60

70

80

90

100

Mexico Brazil Chile Colombia Peru Emerging

economies

Sources: Bank for International Settlements; and Fund staff calculations.

Share of FX Derivatives to Total FX Trade, April 2013(In percent)

PERU


Box 3. Peru: Reassessing Potential Growth After the Investment Boom1

Peru’s productive capacity increased over the last decade. A series of structural reforms and the

implementation of solid macroeconomic and investment frameworks allowed the country to take advantage

of a sizable and prolonged improvement in its terms of trade and historically low global interest rates. The

result was a surge in investment and FDI flows, and a significant improvement in productivity. During

2003−13 growth averaged 6.2 percent—with

investment contributing around half of the total.2 Not

surprisingly, these events also led to an increase in

Peru’s estimated potential growth rate, from around

4 percent in 2003 to about 6 percent in 2013. From a

simple growth accounting exercise, approximately half

of the expanded capacity stemmed from an increase in

the contribution from total factor productivity (TFP),

with the remaining evenly split between capital and

labor additions.

Changes in the external environment, however, call for

a reassessment of potential growth. The two apparent

secular factors that provided a strong tailwind to

growth—positive terms of trade changes and low U.S. interest rates—have started to reverse, and

investment growth has softened. To assess how potential growth will be impacted, staff projected factors of

production and estimated a TFP regression model based on changes in terms of trade and an index of

structural reforms to forecast future TFP movements.

Specifically, for 2015–20, it is assumed that: (i) capital

accumulates at the rate of investment growth in

staff’s baseline macroeconomic outlook;

(ii) employment grows at the current (2014)

2 percent rate; and (iii) human capital growth

remains at its historical rate of 0.3 percent. Predicted

TFP values are based on the regression coefficients

of the TFP model, WEO terms of trade projections,

and staff assumptions on how structural reforms may

evolve. For example, if structural reforms were to

improve at the same rate as during the commodity

boom—a period with few incentives to make

structural improvements—potential growth would only be 3.2 percent. Staff’s baseline scenario estimates

potential growth at 4½ percent, assuming structural reforms proceed at a slightly faster pace in line with the

authorities’ reform plans (with their contribution to TFP partially offset by lower metal prices).

1 Prepared by K. Ross and M. Tashu.

2 Staff Selected Issues papers examine the decade long boom in investment and implications for growth.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1995-2005 2006-14 2015-20

CapitalLaborHuman capitalTFPTotal

Peru: Contributions to Growth (In percent)


0

100

200

300

400

500

600

700

1990 1994 1998 2002 2006 2010

Peru: Investment, Consumption, and Real GDP

(1990=100)

Investment

Consumption

Real GDP

Source: NationalAuthorities.

PERU


Figure 1. Peru: Real Sector Developments

Sources: National Authorities; and Fund staff calculations.

1/ In firms with 10 or more employees, all urban areas.

-4

-2

0

2

4

6

-20

-15

-10

-5

0

5

10

15

20

25

30

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Output gap (RHS)

Real GDP

Domestic demand

Real GDP

(Percent change, year-on-year)

Economic growth declined sharply due to weaker external

conditions and supply shocks.

-20

-5

10

25

-20

-5

10

25

2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1

Private investment Private consumption

Net exports Public investment

Public consumption Change in inventory

GDP growth

Contribution to Growth

(Percent change , year-on-year)

Consumption helped sustain growth, while both

private and public investment faltered.

0

2

4

6

8

0

2

4

6

8

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Headline inflation

Target band

Policy rate

Non-food and non-energy

Inflation continued to hover around the upper limit of the

band starting in 2014...

Inflation


-2

0

2

4

6

8

10

12

14

-2

0

2

4

6

8

10

12

14


Tradables

Non-tradablesFood

...as food and commodity prices stayed elevated, and exchange

rate depreciation was passed through to prices .

Tradable and Non-tradable Inflation


0

2

4

6

8

10

12

0

2

4

6

8

10

12


Employment growth 1/Unemployment

Employment growth moderated...

30

40

50

60

70

80


Business

Confidence

Index

Share of business expecting the

economy to improve in the next three

months.

...while market sentiment has been tepid.

Labor Market

(Percent)Market Sentiment

(Index)

PERU


Figure 2. Peru: Fiscal Sector Developments

-2

-1

0

1

2

3

4

5

6

20

22

24

26

28

30

2009 2010 2011 2012 2013 2014 2015 2016

Primary balance (RHS)

Primary expenditures

Revenue

Percent of GDP

Fiscal surpluses declined mainly due to higher

spending...

-4

-2

0

2

4

6

8

10

12

14

-4

-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012 2013 2014 2015 2016

Fiscal impulse

Output gap

Primary spending (percent, yoy, RHS)

Percent of GDP

..with a positive fiscal impulse projected for 2015.

0

2

4

6

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014 2015 2016

Mining taxes

Mining royalties

Total revenues

Commodity revenue

Fiscal Revenue 1/

(Percent of GDP)

Commodity revenue has been declining...

0

10

20

30

0

10

20

30

2009 2010 2011 2012 2013 2014 2015 2016

Capital Current

..while current expenditure has been on the rise.

Public Expenditure

(Percent of GDP)

-2

-1

0

1

2

3

4

-2

-1

0

1

2

3

4

2009 2011 2013 2015 2017

NFPS overall balance

NFPS structural balance

Overall Fiscal Balance

(Percent of GDP)

The overall and structural fiscal position is projected

to be in deficit over the next few years...

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

2009201020112012201320142015201620172018

External gross debt

Domestic gross debt

Financial assets

Total net debt

Public Debt

(Percent of GDP)

...but with debt stabilizing as a ratio to GDP.

Sources: National Authorities; and Fund staff estimates.

1/ Net of restitutions.

PERU


Figure 3. Peru: External Sector Developments

Figure 3. Peru: External Sector Developments


-40

-30

-20

-10

0

10

20

30

40

50

-20

-15

-10

-5

0

5

10

15

20


Trade balance

Exports volume (year-on-year percent change, RHS)

Imports volume (year-on-year percent change, RHS)

... leading to a decline in exports.

International Trade

(Billion of US dollars)

-2

-1

0

1

2

3

4


Net flows

Assets

Liabilities

Portfolio flows reversed in 2014, mostly reflecting

residents' increased foreign assets ...

Portfolio Flows

(Billions of U.S. dollars)

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2002 2004 2006 2008 2010 2012 2014

Others

MLT loans

Foreign direct investment

Financial account

Financial Account

(Percent of GDP)

...as foreign direct investment flows slowed down

and portfolio flows reversed.

0

20

40

60

80

100

120

140

160

180

0

50

100

150

200

250

300

350

400

450


Copper price

Gold price

Terms of trade, right axis

Metal prices and the terms of trade have deteriorated

recently due to softer external demand...

Metal prices and Terms of Trade

(2005=100)

-4

-2

0

2

4

-4

-2

0

2

4


Net flows

Assets

Liabilities

Short-term Capital Flows

(Billions of U.S. Dollars)

... while short-term capital flows

remained volatile.

-15

-10

-5

0

5

10

15

2002 2004 2006 2008 2010 2012 2014 2016 2018

Other current account

Trade balance

Current account

Overall balance

Financial account

Balance of Payments

(Percent of GDP)

Long-term capital inflows were not sufficient to

finance the current account deficit in 2014...

PERU


Figure 4. Peru: FX and Capital Market Developments

80

100

120

140

160

180

200


Brazil Chile ColombiaMexico Peru

The nuevo sol continued to depreciate, but at a

lower pace than other currencies in the region.

Exchange Rates (US$/LC)

(Index Jan. 2008 =100)

-12

-8

-4

0

4

8

12

-0.8

-0.4

0.0

0.4

0.8

1.2

Equity Funds

Bond Funds

Total Flows

LA4 Equity and Bond Funds (RHS)

Fund Flows

(Billions of U.S. Dollars)

Bond and equity flows have slowed down since the

second half of 2013.

0

50

100

150

200


Brazil Chile ColombiaMexico Peru

Equity prices have retreated, reflecting declines in

metal prices...

Stock Market Indices

(Jan. 2008 =100)

0

50

100

150

200

0

50

100

150

200

2009 2010 2011 2012 2013 2014

Peru Brazil Chile Market Capitalization

(Percent of GDP)

...and so has market capitalization.

0

100

200

300

400

500

600

0

100

200

300

400

500

600

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Peru EMBI

LAC4 EMBI

Corporate EMBI-Peru

Peru CDS

Spreads increased recently, in line with

developments in other emerging market economies...

Country Risk

(Basis Points)

0

2

4

6

8

10

0

1

2

3

4

5

6

7

8

9

10

1Y 2Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y

2012

2014

Sovereign Yield Curve

(Percent, end of period)

...and the sovereign bond yield curve has been

shifting upward since 2012.

Sources: Bloomberg; Haver Analytics; National Authorities; and Fund staff estimates.

PERU


Figure 5. Peru: Financial Sector Developments

-10

0

10

20

30

40

50

60


Total credit

In local currency (LC)

In foreign currency (FC)

Private sector credit growth has continued to

moderate, reflecting slowing economic growth.

Credit Growth(Percent yoy)

-20

0

20

40

60

80

0

20

40

60

80

100

120

140

160

180

200


FC

LC

FC(percent yoy, RHS)

LC(percent yoy, RHS)

Dollarization of corporate loans remains high, although it

has decelerated sharply in recent months...

Business Loans

(Billions of nuevos soles)

-20

0

20

40

60

0

10

20

30

40

50

60


LC

FC

FC (percent yoy, RHS)

LC (percent yoy, RHS)

Consumer Loans

Dollarization of consumer loans remains low.

(Billions of nuevos soles)

-20

0

20

40

60

80

100

120

140

0

10

20

30

40

50


FC

LC

FC (percent yoy, RHS)

LC (percent yoy, RHS)

Home Mortgage(Billions of nuevos soles)

... and the same pattern applies to mortgage loans.

100

140

180

220

260

0

5

10

15

20

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

CAR

NPL

Provisions to NPL (RHS)

Financial Soundness Indicators 1/

(Percent)

Deposit-taking institutions are well-capitalized

and provisioned...


1/ Data corresponds to depository corporations.

0

10

20

30

40

50

60

70

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14

ROA

ROETotal liquid assets to

short-term liabilities LC

Total liquid assets to

short-term liabilities FC

Profitability Indicators 1/

(Percent)

...with comfortable liquidity and profitability

ratios.

PERU


Figure 6: Peru: Balance Sheet Indicators

Sources: National Authorities; Association of Banks; Bank for International Settlements; and Fund

staff estimates.

1/ La Molina, Miraflores, San Borja, San Isidro, and Surco.

-150

-100

-50

0

50

-150

-100

-50

0

50

2000 2002 2004 2006 2008 2010 2012 2014

FDI

Debt

Equity

Net international investment position

Liabilities

Assets

International Investment Position

(Percent of GDP)

Peru's net international investment position

has improved over the past decade.

0

4

8

12

16

20

0

4

8

12

16

20


Assets Liabilities

Foreign Bank Positions vis-à-vis Peru

(Billions of U.S. dollars)

Foreign bank liabilities to and claims on Peru are

growing.

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65


Deposits Private sector credits

Dollarization at Depository Corporations

(Percent, at December 2014 exchange rate )

Dollarization has come down at a

steady pace.

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6


In percent of GDP

In percent of total (RHS)

Non-residents' holding of government

securities is declining, but remains high.

Nonresident Holdings of Securities

(Percent)

0

1

2

3

4

5

6

7

0

5

10

15

20


After a persistent rise in the past, credit card NPL

ratios have started to decline.

Credit Card Debt

(Billion s of nuevo soles)

Total NPL, RHS

400

800

1,200

1,600

2,000

1,000

2,000

3,000

4,000

5,000

6,000


Nuevos soles, constant prices

Nuevos soles, current prices

U.S dollars, constant prices (RHS)

Housing prices have risen in recent years, but

remain close to fundamentals.

Apartment Prices in Residential

Areas of Lima 1/

(Prices per square meter)Credit card NPL, RHS)

Debt outstanding

PERU


Table 1. Peru: Selected Economic Indicators

Prel.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Social Indicators

Life expectancy at birth (years) 1/ 74.2 74.5 ... ... ... ... ... ... ... ...

Infant mortality (per thousand live births) 14.3 13.6 12.9 ... ... ... ... ... ... ...

Adult literacy rate 1/ ... 93.8 ... ... ... ... ... ... ... ...

Poverty rate (total) 27.8 25.8 23.9 ... ... ... ... ... ... ...

Unemployment rate 7.7 6.8 5.9 5.9 ... ... ... ... ... ...

Production and prices

Real GDP 6.5 6.0 5.8 2.4 3.8 5.0 5.5 4.8 4.5 4.5

Real domestic demand 7.7 7.4 7.4 2.0 3.8 4.2 4.8 4.1 4.2 4.5

Consumer prices (end of period) 4.7 2.6 2.9 3.2 2.2 2.0 2.0 2.0 2.0 2.0

Consumer prices (period average) 3.4 3.7 2.8 3.2 2.5 2.0 2.0 2.0 2.0 2.0

External sector

Exports 29.5 2.2 -9.6 -7.8 -9.9 7.9 9.8 8.4 6.2 5.5

Imports 28.9 10.7 2.7 -3.4 -5.6 5.7 6.4 5.1 5.0 4.8

Terms of trade (deterioration -) 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 0.4 0.3 0.2 0.6

Real effective exchange rate (depreciation -) -1.4 8.1 -0.2 -1.5 ... ... ... ... ... ...

Money and credit 2/ 3/

Broad money 15.1 12.1 14.8 8.4 13.6 13.5 14.1 13.8 13.5 13.5

Net credit to the private sector 21.6 13.3 18.4 13.5 13.6 13.5 14.1 13.8 13.5 13.5

Public sector

NFPS revenue 27.2 27.6 27.8 27.5 25.9 26.1 26.0 26.0 26.0 25.8

NFPS primary expenditure 23.9 24.3 25.8 26.6 26.8 26.7 26.2 25.8 25.8 25.8

NFPS primary balance 3.2 3.3 2.0 0.9 -0.9 -0.6 -0.2 0.2 0.1 0.1

NFPS overall balance 2.0 2.3 0.9 -0.2 -2.0 -1.7 -1.4 -1.0 -1.0 -1.0

External Sector

External current account balance -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 -3.7 -3.2 -3.1 -2.9

Gross reserves

In millions of U.S. dollars 48,859 64,049 65,710 62,353 61,353 61,553 62,053 62,553 63,053 64,053

Percent of short-term external debt 4/ 559 494 539 514 449 507 533 520 478 539

Percent of foreign currency deposits at banks 228 301 275 262 259 245 233 223 216 213

Debt

Total external debt 25.6 27.2 27.4 30.2 32.5 31.6 30.6 29.3 27.7 26.7

Gross non-financial public sector debt (incl. repayment certificates) 23.0 21.2 20.3 20.7 21.5 22.3 22.2 21.7 21.3 22.0

External 11.4 9.8 8.8 8.7 8.8 8.8 8.6 8.1 7.2 6.9

Domestic 11.6 11.4 11.5 12.0 12.7 13.5 13.5 13.6 14.2 15.1

Savings and investment

Gross domestic investment 25.7 26.2 28.2 26.8 26.6 26.1 26.0 25.5 25.3 25.3

Public sector (incl. repayment certificates) 4.8 5.4 5.8 5.5 5.8 5.8 5.7 5.7 5.7 5.7

Private sector (incl. inventories) 20.9 20.8 22.3 21.3 20.8 20.4 20.3 19.9 19.6 19.6

National savings 23.9 23.5 24.0 22.8 22.1 21.9 22.3 22.4 22.3 22.4

Public sector 7.4 8.0 7.1 5.6 4.0 4.4 4.6 5.0 5.1 5.1

Private sector 16.4 15.5 16.9 17.2 18.0 17.5 17.7 17.4 17.2 17.3

Memorandum items

Nominal GDP (S/. billions) 469.9 508.3 546.9 576.1 608.9 647.3 692.8 740.4 788.6 840.6

GDP per capita (in US$) 5,685 6,324 6,540 6,458 5,962 6,242 6,579 6,924 7,262 7,623

1/ Data for 2012.

2/ Corresponds to depository corporations.

3/ Foreign currency stocks are valued at end-of-period exchange rates.

4/ Short-term debt is defined on a residual maturity basis and includes amortization of medium and long-term debt.

Sources: National Authorities; UNDP Human Development Indicators; and Fund staff estimates/projections.

Proj.

(In percent of GDP; unless otherwise indicated)

(Annual percentage change; unless otherwise indicated)

PERU


Table 2. Peru: Nonfinancial Public Sector Main Fiscal Aggregates

Prel.

2011 2012 2013 2014 2015 2016 2017 2018 2019

127,673 140,437 152,051 158,411 157,742 169,139 180,010 192,262 204,866

Taxes 77,261 86,097 91,698 97,804 96,818 103,804 109,852 116,811 123,746

Other 50,412 54,340 60,353 60,607 60,924 65,335 70,158 75,450 81,119

Primary expenditures 1/ 112,525 123,413 141,130 153,282 163,356 173,012 181,715 191,041 203,722

Current 86,729 93,507 106,516 119,403 126,043 132,931 139,365 145,850 155,429

Capital 25,796 29,906 34,614 33,879 37,312 40,081 42,351 45,191 48,294

Primary balance 15,149 17,024 10,921 5,129 -5,614 -3,873 -1,706 1,221 1,143

Interest 5,541 5,568 6,090 6,250 6,630 7,275 8,222 8,843 8,829

Overall balance 9,608 11,456 4,832 -1,121 -12,244 -11,148 -9,928 (7,622) (7,685)

External financing 747 -1,385 -4,386 -185 -368 3,360 2,781 54 (3,325)

Domestic financing -10,355 -10,072 -446 1,305 12,612 7,788 7,147 7,567 11,010

Public Gross Debt 2/ 108,184 107,704 111,017 119,303 130,776 144,323 153,635 160,641 168,326

External 53,534 49,719 48,084 50,373 53,633 56,993 59,774 59,828 56,504

Domestic 49,990 53,925 58,961 65,192 73,665 84,112 90,743 97,794 108,905

Repayment Certificates 4,328 3,893 3,972 3,738 3,477 3,218 3,118 3,018 2,918

Public Assets 62,031 76,999 85,404 90,618 ... ... ... ... ...

Revenues 27.2 27.6 27.8 27.5 25.9 26.1 26.0 26.0 26.0

Taxes 16.4 16.9 16.8 17.0 15.9 16.0 15.9 15.8 15.7

Other 10.7 10.7 11.0 10.5 10.0 10.1 10.1 10.2 10.3

Primary expenditures 1/ 23.9 24.3 25.8 26.6 26.8 26.7 26.2 25.8 25.8

Current 18.5 18.4 19.5 20.7 20.7 20.5 20.1 19.7 19.7

Capital 5.5 5.9 6.3 5.9 6.1 6.2 6.1 6.1 6.1

Primary balance 3.2 3.3 2.0 0.9 -0.9 -0.6 -0.2 0.2 0.1

Interest 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.1

Overall balance 2.0 2.3 0.9 -0.2 -2.0 -1.7 -1.4 -1.0 -1.0

External financing 0.2 -0.3 -0.8 0.0 -0.1 0.5 0.4 0.0 -0.4

Domestic financing -2.2 -2.0 -0.1 0.2 2.1 1.2 1.0 1.0 1.4

Public Gross Debt 2/ 23.0 21.2 20.3 20.7 21.5 22.3 22.2 21.7 21.3

External 11.4 9.8 8.8 8.7 8.8 8.8 8.6 8.1 7.2

Domestic 10.6 10.6 10.8 11.3 12.1 13.0 13.1 13.2 13.8

Repayment Certificates 0.9 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4

Public Assets 13.2 15.1 15.6 15.7 ... ... ... ... ...

6.3 8.2 8.1 8.1 ... ... ... ... ...

Public Net Debt 9.8 6.0 4.7 5.0 ... ... ... ... ...

Commodity related revenues 3/ 4.3 3.9 2.8 2.6 1.9 2.0 2.2 2.2 2.2

Output gap (% of potential GDP) 0.3 0.6 1.3 -1.0 -1.7 -1.2 -0.3 0.0 0.0

NFPS structural balance 4/ 1.2 1.6 0.3 0.2 -1.3 -1.1 -1.2 -0.9 -0.9

NFPS structural primary balance 4/ 2.3 2.7 1.5 1.2 -0.2 0.0 0.0 0.3 0.2

Fiscal impulse (+ = expansionary) -1.6 -0.3 1.2 0.3 1.4 -0.2 0.0 -0.2 0.1


(FEPC) but includes corresponding cash payments.

3/ Net of tax restitutions.

4/ Adjusted by the economic cycle and commodity prices. The latter uses as equilibrium commodity prices a moving average

estimate that takes 5 years of historical prices and 3 years of forward prices according to WEO.

2/ Official data excludes stock of debt accumulated and not paid during the period by Repayment Certificates (CRPAOs) and

Petrolium Price Stabilzation Fund (FEPC).

1/ Official data excludes expense accrued during the period by Repayment Certificates (CRPAOs) and Petrolium Price Stabilzation

(In millions of nuevos soles; unless otherwise indicated)


Memorandum items

Projections

Revenues

Of which: Treasury Deposits and Fiscal

Stabilization Fund

PERU


Table 3. Peru: Statement of Operations of the General Government 1/

Prel.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 21.8 22.4 22.3 22.4 21.1 21.3 21.1 21.0 21.1 20.9

Taxes 16.4 16.9 16.8 17.0 15.9 16.0 15.9 15.8 15.7 15.6

Social Contributions 1.9 2.0 2.1 2.2 2.1 2.3 2.2 2.2 2.2 2.3

Grants 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Other revenue 3.2 3.3 3.3 3.2 3.0 2.9 2.9 2.9 3.1 3.1

Of which: Interest income 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Expense 2/ 14.8 14.7 15.6 16.7 16.8 16.7 16.3 15.9 15.8 15.7

Compensation of employees 4.9 4.9 5.3 6.0 6.1 6.3 6.1 6.0 6.1 6.1

Use of goods and services 5.1 5.6 6.3 6.0 6.4 6.0 5.6 5.6 5.6 5.6

Consumption of fixed capital 2/ 5.0 5.6 6.0 5.8 5.9 5.9 5.9 6.0 6.0 6.0

Interest 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.0

Social benefits 2.1 2.0 2.0 1.9 2.0 1.9 2.2 2.0 1.9 1.8

Other expenses 3/ 1.5 1.1 1.0 1.7 1.3 1.4 1.3 1.1 1.1 1.2

Net acquisition of nonfinancial assets 5.0 5.6 6.0 5.8 5.9 5.9 5.9 6.0 6.0 6.0

Acquistions of nonfinancial assets 5.0 5.6 6.0 5.8 5.9 5.9 5.9 6.0 6.0 6.0

Gross Operating Balance 7.0 7.7 6.7 5.7 4.3 4.6 4.8 5.1 5.3 5.3

Net lending (+) borrowing (-) 4/ 2.0 2.1 0.8 -0.1 -1.6 -1.3 -1.1 -0.9 -0.8 -0.7

Net acquistion of financial assets 5/ 1.3 2.1 0.0 0.0 -0.7 0.4 -0.1 -0.1 0.0 -1.0

By instrument

Monetary gold and SDRs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Currency and deposits 6/ 1.3 2.1 0.0 0.0 -0.7 0.4 -0.1 -0.1 0.0 -1.0

By residency

Domestic 1.3 2.1 0.0 0.0 -0.7 0.4 -0.1 -0.1 0.0 -1.0

External 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net incurrence of liabilities 7/ -0.7 0.0 -0.8 0.1 0.9 1.7 1.0 0.8 0.8 -0.2

By instrument

Debt securities -0.9 0.1 0.1 0.1 1.0 1.1 0.6 0.8 1.2 -0.4

Loans 0.2 -0.1 -0.8 0.0 -0.1 0.5 0.4 0.0 -0.4 0.1

By residency

Domestic -0.9 0.1 0.1 0.1 1.0 1.1 0.6 0.8 1.2 -0.4

External 0.2 -0.1 -0.8 0.0 -0.1 0.5 0.4 0.0 -0.4 0.1

Central Government Net lending (+) borrowing (-) 0.4 0.8 -0.1 -1.0 -1.8 -1.2 -1.1 -1.0 -1.1 -1.1

Regional Governments Net lending (+) borrowing (-) 0.6 0.6 0.4 0.6 0.4 0.4 0.4 0.5 0.6 0.7

Local Governments Net lending (+) borrowing (-) -1.1 -0.2 -0.2 0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2

General Government Primary Balance 3.2 3.1 1.9 0.9 -0.7 -0.3 -0.1 0.2 0.2 0.2

General Government Overall Balance 2.0 2.1 0.8 -0.1 -1.7 -1.4 -1.2 -1.0 -0.8 -0.8

Gen. Gov. primary spending (real percentage change) 1.8 7.6 11.2 7.0 4.2 3.4 2.7 3.2 4.5 4.3

Of which: Current spending 7.0 4.8 11.2 10.2 4.1 3.3 2.0 1.9 4.4 4.0

Capital spending -9.6 14.8 11.0 -0.5 4.6 3.8 4.7 6.5 4.9 5.0

General Government non-financial expenditures 18.6 19.2 20.4 21.4 21.7 21.5 21.1 20.7 20.8 20.7


1/ Fiscal data is not fully compiled on an accrual basis.

3/ Includes transfers to the Petrolium Price Stabilzation Fund (FEPC).

4/ Net lending (+)/ borrowing (-) is equal to gross operating balance minus net acquistions of nonfinancial assets.

5/ (+) corresponds to increase in financial assets; (-) to a decrease in financial assets.

6/ Includes Fiscal Stabilization Fund (FEF).

7/ (+) corresponds to increase in liabilities (disbursement and/or issuance); (-) to decrease in liabilities (amortizations).

Memorandum items

Projections


2/ Official data excludes expense accrued during the period by Repayment Certificates (CRPAOs) and Petrolium Price Stabilzation Fund (FEPC), but

includes corresponding cash payments.

PERU


Table 4. Peru: General Government Stock Positions

Prel.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Stock positions:

Net worth .... .... .... .... .... .... .... .... .... ....

Nonfinancial assets .... .... .... .... .... .... .... .... .... ....

Net financial worth -7.2 -4.5 -3.5 -3.4 -4.9 -5.9 -6.6 -7.0 -7.4 -7.7

Financial assets 11.7 12.9 12.0 11.4 10.1 9.8 9.1 8.4 7.9 6.4

By instrument

Currency and deposits 2/ 11.4 12.6 11.7 11.1 9.8 9.6 8.9 8.2 7.7 6.2

Debt securities 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2

By residency

Domestic 11.4 12.6 11.7 11.1 9.8 9.6 8.9 8.2 7.7 6.2

External 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2

By currency 3/

Domestic 11.6 12.8 11.2 10.5 9.7 9.5 8.8 8.2 7.7 6.2

Foreign 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2

Liabilities 4/ 18.9 17.5 15.5 14.8 14.9 15.7 15.7 15.5 15.3 14.1

By instrument

Debt securities 12.7 11.9 11.1 10.7 11.1 11.5 11.4 11.4 11.9 10.8

Loans 6.1 5.6 4.4 4.1 3.9 4.2 4.3 4.0 3.3 3.3

By residency

Domestic 7.1 6.6 6.2 6.0 6.7 7.4 7.5 7.8 8.5 7.6

External 11.8 10.8 9.3 8.8 8.2 8.3 8.1 7.6 6.7 6.5

By currency 3/

Domestic 10.5 10.4 10.0 10.3 11.7 12.6 12.7 12.8 13.5 14.5

Foreign 8.4 7.0 5.5 4.5 3.3 3.1 3.0 2.6 1.8 -0.4

Fiscal Stabilization Fund and other public savings 3.3 3.7 3.5 3.5 3.0 3.2 2.9 2.7 2.5 2.3

Debt of SOEs guaranteed by government 5/ 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.5 0.5


1/ Assuming zero other economic flows.

2/ Includes stocks of Fiscal Stabilization Fund (FEF).

3/ Preliminary data.

5/ This debt is excluded from general government liabilities since it is a liability of SOEs.

4/ Excludes debt of public enterprises guaranteed by the central government, debt of Petrolium Price Stabilzation Fund (FEPC), and Repayment

Certificates (CRPAOs).

Memorandum items

Projections 1/


PERU


Table 5: Peru: Balance of Payments

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Current account -3.2 -5.2 -8.5 -8.0 -8.6 -8.5 -8.0 -7.3 -7.5 -7.6

Merchandise trade 9.2 6.3 0.6 -1.3 -2.9 -2.3 -1.1 0.2 0.8 1.1

Exports 46.4 47.4 42.9 39.5 35.6 38.4 42.2 45.7 48.6 51.3

Traditional 35.9 35.9 31.6 27.7 23.6 25.8 28.9 31.5 33.2 35.0

Mining 27.5 27.5 23.8 20.5 18.4 19.8 22.3 24.5 26.0 27.5

Nontraditional and others 10.5 11.5 11.3 11.8 12.0 12.6 13.3 14.3 15.4 16.3

Imports -37.2 -41.1 -42.2 -40.8 -38.5 -40.7 -43.3 -45.6 -47.8 -50.1

Services, income, and current transfers (net) -12.4 -11.5 -9.1 -6.8 -5.7 -6.2 -6.9 -7.5 -8.3 -8.7

Services -2.2 -2.4 -1.8 -1.8 -1.5 -1.7 -2.1 -2.3 -2.6 -2.8

Investment income -13.4 -12.4 -10.6 -9.3 -7.6 -8.1 -8.7 -9.2 -10.0 -10.5

Current transfers 3.2 3.3 3.3 4.4 3.5 3.7 3.9 4.0 4.2 4.6

Capital and financial account balance 8.7 19.8 11.4 6.4 7.6 8.7 8.5 7.8 8.0 8.6

Public sector 0.7 1.4 -1.3 0.0 0.5 1.8 1.6 0.8 -0.2 1.2

Medium-term loans 0.1 0.2 -1.3 1.3 -0.1 1.1 0.9 0.0 -1.0 0.4

Disbursements 1.0 0.9 0.7 1.3 2.8 2.4 1.7 1.1 1.1 1.1

Amortization 0.9 1.2 2.4 1.5 2.9 1.4 0.8 1.1 2.1 0.7

Other public sector flows 1/ 0.5 1.2 0.0 -1.3 0.6 0.7 0.7 0.8 0.8 0.8

Net external assets -0.3 -0.5 0.1 -0.6 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2

Other transactions of Treasury bonds 0.8 1.7 -0.1 -0.8 0.8 0.9 0.9 1.0 1.0 1.0

Short-term flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private sector 8.1 18.4 12.8 6.4 7.1 6.9 7.0 7.0 8.3 7.4

Foreign direct investment (net) 2/ 7.5 11.8 9.2 7.5 6.9 6.9 6.9 7.1 7.2 7.4

Medium- and long-term loans 3.0 4.0 1.0 0.3 0.3 0.5 0.6 0.6 0.6 0.6

Portfolio investment -1.2 -0.1 4.7 -1.8 -0.3 -0.3 0.1 0.1 0.1 0.1

Short-term flows 3/ -1.2 2.6 -2.1 0.4 0.2 -0.1 -0.6 -0.8 0.4 -0.6

Errors and omissions -0.9 0.2 0.0 -0.5 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance 4.7 14.8 2.9 -2.2 -1.0 0.2 0.5 0.5 0.5 1.0

Financing -4.7 -14.8 -2.9 2.2 1.0 -0.2 -0.5 -0.5 -0.5 -1.0

NIR flow (increase -) -4.7 -14.8 -2.9 2.2 1.0 -0.2 -0.5 -0.5 -0.5 -1.0

Change in NIR (increase -) -4.7 -15.2 -1.7 3.4 1.0 -0.2 -0.5 -0.5 -0.5 -1.0

Valuation change 0.0 0.4 -1.2 -1.2 0.0 0.0 0.0 0.0 0.0 0.0

Current account balance -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 -3.7 -3.2 -3.1 -2.9

Trade balance 5.4 3.3 0.3 -0.6 -1.5 -1.1 -0.5 0.1 0.3 0.4

Exports 27.2 24.6 21.2 19.5 18.7 19.0 19.5 19.8 19.7 19.5

Traditional 21.0 18.6 15.6 13.6 12.4 12.8 13.4 13.6 13.5 13.3

Mining 16.1 14.3 11.8 10.1 9.7 9.8 10.3 10.6 10.5 10.5

Nontraditional and others 6.1 6.0 5.6 5.8 6.3 6.2 6.1 6.2 6.2 6.2

Imports -21.8 -21.3 -20.9 -20.1 -20.2 -20.1 -20.0 -19.7 -19.4 -19.1

Services, income, and current transfers (net) -7.3 -6.0 -4.5 -3.3 -3.0 -3.1 -3.2 -3.2 -3.4 -3.3

Investment income -7.8 -6.4 -5.3 -4.6 -4.0 -4.0 -4.0 -4.0 -4.0 -4.0

Capital and financial account balance 5.1 10.3 5.6 3.1 4.0 4.3 3.9 3.4 3.3 3.3

Foreign direct investment (net) 4.4 6.1 4.5 3.7 3.6 3.4 3.2 3.1 2.9 2.8

Overall balance 2.7 7.7 1.4 -1.1 -0.5 0.1 0.2 0.2 0.2 0.4

Memorandum items

Export value 29.5 2.2 -9.6 -7.8 -9.9 7.9 9.8 8.4 6.2 5.5

Volume growth 6.6 4.6 -4.2 -1.0 2.7 7.0 8.0 7.0 5.0 4.0

Price growth 21.5 -2.2 -5.7 -6.9 -12.3 0.8 1.7 1.3 1.1 1.4

Import value 28.9 10.7 2.7 -3.4 -5.6 5.7 6.4 5.1 5.0 4.8

Volume growth 13.8 10.9 2.7 -1.9 2.8 4.0 5.0 4.1 4.0 4.0

Price growth 13.3 -0.2 0.0 -1.5 -8.1 1.6 1.3 1.0 0.9 0.8

Terms of trade 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 0.4 0.3 0.2 0.6

Gross international reserves (in billions of US$) 48.9 64.0 65.7 62.4 61.4 61.6 62.1 62.6 63.1 64.1

Sources: National Authorities; and Fund staff estimates/projections.

1/ Includes public sector's net external assets and other transactions involving Treasury bonds.

2/ Excluding privatization.

3/ Includes Financial Corporation for Development (COFIDE) and the National Bank.

(In billions of U.S. dollars; unless otherwise noted)

Projections


(In percent of GDP)

PERU


Table 6. Peru: Monetary Survey 1/

2011 2012 2013 2014 2015 2016

Net foreign assets 110 138 144 140 150 150

(In billions of U.S. dollars) 57 74 80 78 76 76

Net international reserves 2/ 132 163 184 186 196 197

(In billions of U.S. dollars) 49 64 66 62 61 62

Long-term net external assets 0 0 0 0 0 0

Foreign currency liabilities -22 -25 -40 -46 -47 -47

Net domestic assets -70 -85 -92 -95 -90 -83

Net credit to nonfinancial public sector -42 -55 -61 -67 -66 -65

Credit to the financial sector 3/ -11 -9 -8 -8 -8 -8

Securities issued -16 -27 -22 -14 -16 -18

Other assets (net) -1 6 -2 -6 0 7

Monetary base 40 53 52 54 60 67

Currency 27 32 35 39 43 48

Reserve 13 20 17 15 17 19


Net domestic assets 46 45 50 68 90 124

Net credit to the public sector -53 -69 -73 -74 -62 -54

Credit to the private sector 148 168 198 225 256 291

Other assets (net) -49 -54 -76 -83 -104 -113

Broad money 157 176 203 220 250 283

Domestic currency 100 122 136 149 174 203

Foreign currency 58 54 67 71 76 80


Net domestic assets 103 115 119 143 184 238

Net credit to the public sector -36 -51 -58 -51 -42 -37

Credit to the private sector 188 213 240 271 296 330

Other assets (net) -49 -48 -63 -77 -70 -55

Liabilities to the private sector 254 293 322 354 402 457

Domestic currency 187 229 246 272 315 365

Foreign currency 67 64 76 82 87 92

Monetary base 16.8 31.9 -1.5 3.7 10.9 12.0

Broad money 15.1 12.1 14.8 8.4 13.6 13.5

Domestic currency 16.6 22.8 11.0 9.5 17.0 16.8

Foreign currency 12.6 -6.4 23.5 6.1 6.6 6.1

Liabilities to the private sector 5.5 15.4 10.1 9.9 13.6 13.5


Foreign currency 7.6 -4.3 19.0 7.4 6.2 5.7

Depository corporations credit to the private sector 21.6 13.3 18.4 13.5 13.6 13.5


Foreign currency 23.2 9.9 12.9 6.2 -3.4 0.0


1/ Stocks in foreign currency are valued at the end-of-period exchange rate.

2/ Excludes subscriptions to the IMF and the Latin American Reserve Fund, Pesos Andinos, credit lines to other

central banks, Andean Development Corporation bonds, and foreign assets temporarily held by the Central Bank as

part of swap operations.

3/ Including the National Bank.

4/ Depository corporations comprise the Central Bank, the National Bank, commercial banks, the Agricultural Bank,

financial firms, municipal banks, rural banks and credit unions.

5/ Financial system comprises depository corporations and other financial corporations. Other financial companies

include mutual funds, COFIDE, insurance companies, leasing companies, pension funds,

the Financing Agency for Small and Medium-sized Enterprises and the Fund for Financing Housing.

(In billions of nuevos soles; unless otherwise noted)

Projections

(12-month percentage change)

I. Central Reserve Bank

II. Depository Corporations 4/

III. Financial System 5/

PERU


Table 7. Peru: Financial Soundness Indicators 1/

Dec-11 Dec-12 Dec-13 Nov-14 Dec-14

Capital Adequacy

Capital to risk-weighted assets 2/ 13.7 14.4 13.9 14.5 ...

Regulatory Tier I capital to risk-weighted assets 3/ 10.8 10.9 10.4 10.6 ...

Nonperforming loans net of provisions to capital 4/ -14.7 -12.6 -10.8 -9.1 ...

Leverage 5/ 7.7 7.9 7.9 8.5 ...

Asset Quality

Nonperforming loans to total gross loans 4/ 1.8 2.2 2.6 3.0 2.9

In domestic currency 2.5 3.0 3.3 3.6 3.4

In foreign currency 1.0 1.1 1.5 2.0 2.1

Nonperforming, refinanced and restructured loans to total gross loans 4/ 6/ 2.9 3.2 3.6 4.1 4.0



Refinanced and restructured loans to total gross loans 1.1 1.1 1.0 1.1 1.1

Provisions to nonperforming loans 4/ 225.2 202.0 175.2 158.2 157.7

Provisions to nonperforming, restructured, and refinanced loans 4/ 6/ 142.3 134.9 126.3 116.1 114.4

Sectoral distribution of loans to total loans

Consumer loans 18.6 19.1 18.4 18.2 18.1

Mortgage loans 13.5 14.7 15.3 15.6 15.5

Corporate 18.1 15.8 17.6 17.1 17.2

Large firms 15.4 15.3 15.5 16.9 17.0

Medium size firms 17.2 17.5 17.6 18.0 18.3

Small firms 11.8 12.5 11.4 10.4 10.1

Microenterprises 5.5 5.2 4.3 3.9 3.8

Earnings and Profitability

Return on equity (ROE) 23.5 21.5 20.0 18.5 18.2

Return on assets (ROA) 2.3 2.2 2.0 1.9 1.9

Financial revenues to total revenues 82.0 82.7 85.6 85.2 85.0

Annualized financial revenues to revenue-generating assets 11.1 11.2 10.9 10.6 10.6

Liquidity

Total liquid assets to total short-term liabilities (monthly average basis) 40.5 45.0 43.0 40.8 39.4



Deposit-to-loan 95.3 95.2 98.1 91.1 90.5

Foreign Currency Position and Dollarization

Share of foreign currency deposits in total deposits 43.9 38.2 43.6 43.5 43.4

Share of foreign currency loans in total credit 45.8 44.4 41.1 38.7 38.4

Operational efficiency

Financing to related parties to capital 7/ 9.3 11.5 9.3 8.8 9.43

Nonfinancial expenditure to total revenues 8/ 33.7 33.6 33.7 33.1 33

Annualized Nonfinancial expenditure to total revenue-generating assets 8/ 4.6 4.6 4.3 4.2 4.13

Memorandum items

General Stock market index IGBVL 19,474 20,629 15,754 15,107 14,794.3

EMBI+ PERU spread, basis points 216 114 159 165 181

Source: National Authorities.

1/ These indicators correspond to depository corporations.

7/ Financing to related parties corresponds to those loans to individuals and firms owning more than 4 percent of the bank.

8/ Nonfinancial expenditures do not consider provisions nor depreciation.

5/Tier I regulatory capital / Total Exposure (on-balance sheet exposures, derivative exposures and off-balance exposures converted

into credit exposure equivalents using credit conversion factors).

6/ Includes restructured loans, refinanced loans, and arrears. Refinanced loans refer to those loans subjected to either term and/or

principal modifications with respect to the initial debt contract. Restructured loans refer to those loans whose payments have been

restructured according to the "Ley General del Sistema Concursal."

2/ Since July 2009, the regulatory capital requirement applied to all risks: credit, market and operational risk.

3/ Since July 2009, Banking Law component establishes that the Tier I capital have to be defined, and Risk-weighted assets include

overall risks (credit, market and operational).

4/ Nonperforming loans are overdue loans after 15 days since the due date for commercial loans, and after 30 days for small

businesses loans. In the case of mortgage, consumer and leasing loans, they are considered overdue after 30 days since the due date

only for the non paid portion and after 90 days for all the credit. The overdue loans include credits under judicial resolution.

(In percent; unless otherwise indicated)

PERU


Table 8. Peru: Financial and External Vulnerability Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Financial indicators

Public sector debt/GDP 23.0 21.2 20.3 20.7 21.5 22.3 22.2 21.7 21.3 22.0

Of which: in domestic currency (percent of GDP) 11.2 11.0 11.5 12.0 12.7 13.5 13.5 13.6 14.2 15.1

90-day prime lending rate, domestic currency (end of period) 5.4 5.0 4.5 4.7 ... ... ... ... ... ...

90-day prime lending rate, foreign currency (end of period) 2.4 4.0 1.0 0.7 ... ... ... ... ... ...

Velocity of money 1/ 3.0 2.9 2.7 2.6 2.4 2.3 2.1 2.0 1.9 1.8

Net credit to the private sector/GDP 2/ 31.5 33.0 36.3 39.1 42.0 44.9 47.9 51.0 54.3 57.8

External indicators

Exports, U.S. dollars (percent change) 29.5 2.2 -9.6 -7.8 -9.9 7.9 9.8 8.4 6.2 5.5

Imports, U.S. dollars (percent change) 28.9 10.7 2.7 -3.4 -5.6 5.7 6.4 5.1 5.0 4.8

Terms of trade (percent change) (deterioration -) 3/ 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 0.4 0.3 0.2 0.6

Current account balance (percent of GDP) -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 -3.7 -3.2 -3.1 -2.9

Capital and financial account balance (percent of GDP) 5.1 10.3 5.6 3.1 4.0 4.3 3.9 3.4 3.3 3.3

Total external debt (percent of GDP) 25.6 27.2 27.4 30.2 32.5 31.6 30.6 29.3 27.7 26.7

Medium- and long-term public debt (in percent of GDP) 4/ 11.6 10.2 9.2 10.2 11.2 11.5 11.5 11.1 10.3 10.1

Medium- and long-term private debt (in percent of GDP) 10.3 12.4 15.0 16.5 17.6 16.6 15.8 15.1 14.5 13.8

Short-term public and private debt (in percent of GDP) 3.7 4.6 3.2 3.5 3.7 3.5 3.3 3.1 2.9 2.8

Total external debt (in percent of exports of goods and services) 4/ 86.3 100.3 113.9 134.8 150.2 144.9 137.8 130.9 124.7 121.8

Total debt service (in percent of exports of goods and services) 5/ 8.0 11.0 16.0 16.1 20.9 16.0 13.8 13.7 15.0 11.9

Gross official reserves

In millions of U.S. dollars 48,859 64,049 65,710 62,353 61,353 61,553 62,053 62,553 63,053 64,053

In percent of short-term external debt 6/ 559.1 494.2 539.5 514.3 448.8 506.9 533.2 520.4 478.0 539.0

In percent of short-term external debt, foreign currency deposits,

and adjusted CA balance 6/ 7/ 125.2 132.5 127.8 125.6 120.1 121.0 120.5 118.9 114.0 116.1

In percent of broad money 8/ 83.7 93.6 90.7 84.8 78.7 69.5 61.4 54.4 48.3 43.3

In percent of foreign currency deposits at banks 227.7 301.2 274.8 261.5 259.2 245.2 233.1 223.5 216.2 212.5

In months of next year's imports of goods and services 12.1 15.4 16.3 16.4 15.3 14.4 13.8 13.3 12.8 12.4

Net international reserves (in millions of U.S. dollars) 48,816 63,991 65,663 62,308 61,308 61,508 62,008 62,508 63,008 64,008

Central Bank's Foreign Exchange Position 33,300 46,063 41,097 35,368 34,368 34,568 35,068 35,568 36,068 37,068

Sources: National Authorities; IMF's Information Notice System (INS); and Fund staff estimates/projections.

1/ Defined as the inverse of the ratio of end-period broad money to annual GDP.

2/ Corresponds to depository corporations.

3/ End of period; data from INS.

4/ Includes Central Bank's debt.

5/ Includes debt service to the Fund.

6/ Short-term debt includes amortization of medium- and long-term loans falling due over the following year, including debt swaps.

7/ Current Account deficit adjusted for 0.75*net FDI inflows; if adjusted CA balance>0, set to 0.

8/ At end-period exchange rate.

Projections

(In percent; unless otherwise indicated)

PERU


Table 9. Medium-Term Macroeconomic Framework

Prel.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Production

GDP at constant prices 6.5 6.0 5.8 2.4 3.8 5.0 5.5 4.8 4.5 4.5

Consumer prices (end of period) 4.7 2.6 2.9 3.2 2.2 2.0 2.0 2.0 2.0 2.0

GDP deflator 5.2 2.1 1.7 2.9 1.8 1.3 1.4 2.0 1.9 2.0

Trade

Merchandise trade

Exports, f.o.b. 29.5 2.2 -9.6 -7.8 -9.9 7.9 9.8 8.4 6.2 5.5

Imports, f.o.b. 28.9 10.7 2.7 -3.4 -5.6 5.7 6.4 5.1 5.0 4.8

Terms of trade (deterioration -) 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 0.4 0.3 0.2 0.6

External current account balance -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 -3.7 -3.2 -3.1 -2.9

Total external debt service 1/ 2.4 3.0 3.8 3.6 4.5 3.5 3.1 3.1 3.3 2.6

Medium- and long-term 2.3 2.9 3.8 3.5 4.5 3.4 3.0 3.0 3.3 2.6

Nonfinancial public sector 1.1 1.2 1.8 1.3 2.0 1.1 0.8 0.9 1.3 0.6

Private sector 1.2 1.7 1.9 2.2 2.5 2.3 2.2 2.1 2.0 1.9

Short-term 2/ 0.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0

Nonfinancial public sector 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private sector 0.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0

Interest 1.0 0.9 1.0 1.1 1.1 1.0 1.0 1.0 0.9 0.8

Amortization (medium-and long-term) 1.4 2.1 2.8 2.5 3.5 2.5 2.1 2.1 2.4 1.8

Public sector

NFPS primary balance 3/ 3.2 3.3 2.0 0.9 -0.9 -0.6 -0.2 0.2 0.1 0.1

General government revenue 21.8 22.4 22.3 22.4 21.1 21.3 21.1 21.0 21.1 20.9

General govt. non-interest expenditure 3/ 23.9 24.3 25.8 26.6 26.8 26.7 26.2 25.8 25.8 25.8

NFPS interest due 1.2 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.1 1.0

NFPS overall balance 3/ 2.0 2.3 0.9 -0.2 -2.0 -1.7 -1.4 -1.0 -1.0 -1.0

Public sector debt 3/ 23.0 21.2 20.3 20.7 21.5 22.3 22.2 21.7 21.3 22.0

Savings and investment

Gross domestic investment 25.7 26.2 28.2 26.8 26.6 26.1 26.0 25.5 25.3 25.3

Public sector 3/ 4.8 5.4 5.8 5.5 5.8 5.8 5.7 5.7 5.7 5.7

Private sector 20.9 20.8 22.3 21.3 20.8 20.4 20.3 19.9 19.6 19.6

Private sector (excluding inventories) 19.2 20.4 20.8 20.3 19.9 19.7 19.6 19.1 18.8 18.3

Inventory changes 1.8 0.4 1.5 1.0 1.0 0.7 0.8 0.7 0.8 1.2

National savings 23.9 23.5 24.0 22.8 22.1 21.9 22.3 22.4 22.3 22.4

Public sector 4/ 7.4 8.0 7.1 5.6 4.0 4.4 4.6 5.0 5.1 5.1

Private sector 16.4 15.5 16.9 17.2 18.0 17.5 17.7 17.4 17.2 17.3

External savings 1.9 2.7 4.2 4.0 4.5 4.2 3.7 3.2 3.1 2.9

Memorandum items

Nominal GDP (billions of nuevos soles) 469.9 508.3 546.9 576.1 608.9 647.3 692.8 740.4 788.6 840.6

Gross international reserves (billions of U.S. dollars) 48.9 64.0 65.7 62.4 61.4 61.6 62.1 62.6 63.1 64.1

External debt service (percent of exports of GNFS) 8.0 11.0 16.0 16.1 20.9 16.0 13.8 13.7 15.0 11.9

Short-term external debt service (percent of exports of GNFS) 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Public external debt service (percent of exports of GNFS) 3.8 4.4 7.6 5.8 9.3 5.1 3.7 4.1 5.8 2.9


1/ Includes interest payments only.

2/ Includes the financial public sector.

3/ Includes Repayment Certificates (CRPAOs).

4/ Excludes privatization receipts.



Projections

PERU


Table 10. Peru: Public Sector Debt Sustainability Analysis―Baseline Scenario

Prel. As of April 14, 20152/

2013 2014 2015 2016 2017 2018 2019 2020 Sovereign Spreads

Nominal gross public debt 24.5 20.3 20.7 21.5 22.3 22.2 21.7 21.3 22.0 Spread (bp) 3/ 179

Public gross financing needs 1.3 0.6 1.8 3.9 2.9 3.0 2.4 2.8 3.3 CDS (bp) 138

Real GDP growth (in percent) 5.5 5.8 2.4 3.8 5.0 5.5 4.8 4.5 4.5 Ratings Foreign Local

Inflation (GDP deflator, in percent) 2.9 2.8 3.2 2.5 2.0 2.0 2.0 2.0 2.0 Moody's n.a. A3 positive A3 positive

Nominal GDP growth (in percent) 9.4 7.6 5.3 5.7 6.3 7.0 6.9 6.5 6.6 S&Ps BBB+ stable A stable

Effective interest rate (in percent) 4/ 5.1 5.7 5.6 5.4 5.9 6.4 7.1 7.4 7.9 Fitch BBB+ Stable A Stable

Prel.

2013 2014 2015 2016 2017 2018 2019 2020 cumulative

Change in gross public sector debt -1.7 -0.9 0.4 0.8 0.8 -0.1 -0.5 -0.4 0.6 1.3

Identified debt-creating flows -3.2 -1.7 -0.3 1.5 0.5 0.1 0.0 0.1 0.3 2.4

Primary deficit -1.7 -1.9 -0.8 1.0 0.7 0.4 -0.1 0.0 0.0 2.0

Primary (noninterest) revenue and grants26.3 27.7 27.4 25.8 26.0 25.9 25.9 25.9 25.8 155.2

Primary (noninterest) expenditure 24.6 25.8 26.6 26.8 26.7 26.2 25.8 25.8 25.8 157.2

Automatic debt dynamics 5/

-1.5 0.2 0.5 0.4 -0.2 -0.3 0.0 0.2 0.3 0.4

Interest rate/growth differential 6/

-0.8 -0.6 -0.1 -0.2 -0.2 -0.3 0.0 0.2 0.3 -0.2

Of which: real interest rate 0.5 0.5 0.3 0.5 0.8 0.9 1.0 1.1 1.2 5.5

Of which: real GDP growth -1.3 -1.1 -0.5 -0.7 -1.0 -1.1 -1.0 -0.9 -0.9 -5.7

Exchange rate depreciation 7/

-0.7 0.8 0.6 … … … … … … …

Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other debt-creating flows (specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes 8/

1.6 0.8 0.7 -0.1 0.3 -0.2 -0.5 -0.5 0.3 -0.5

Sources: National Authorities; Fund staff estimates.

1/ Public sector is defined as non-financial public sector.

2/ Based on available data.

3/ Bond Spread over U.S. Bonds.

4/ Defined as interest payments divided by debt stock at the end of previous year.

5/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate;

a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

8/ For projections, this line includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

0.3

balance 9/

primary

(In percent of GDP unless otherwise indicated)

Debt, Economic and Market Indicators 1/

2009-2012

Projections

Contribution to Changes in Public Debt

Projections

2009-2012

debt-stabilizing

Actual

Actual

-8

-6

-4

-2

0

2

4

6

8

10

cumulative

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Debt-Creating Flows

Primary deficit Real GDP growth Real interest rate Exchange rate depreciation Other debt-creating flows Residual Change in gross public sector debt

(In percent of GDP)

PERU


Figure 7. Peru: Public Sector Debt Sustainability Analysis—Composition of Public Debt and

Alternative Scenarios

Baseline Scenario 2015 2016 2017 2018 2019 2020 Historical Scenario 2015 2016 2017 2018 2019 2020

Real GDP growth 3.8 5.0 5.5 4.8 4.5 4.5 Real GDP growth 3.8 6.2 6.2 6.2 6.2 6.2

Inflation 2.5 2.0 2.0 2.0 2.0 2.0 Inflation 2.5 2.0 2.0 2.0 2.0 2.0

Primary Balance -1.0 -0.7 -0.4 0.1 0.1 0.0 Primary Balance -1.0 2.4 2.4 2.4 2.4 2.4

Effective interest rate 5.4 5.9 6.4 7.1 7.4 7.9 Effective interest rate 5.4 5.9 6.7 7.9 8.9 9.8

Constant Primary Balance Scenario

Real GDP growth 3.8 5.0 5.5 4.8 4.5 4.5

Inflation 2.5 2.0 2.0 2.0 2.0 2.0

Primary Balance -1.0 -1.0 -1.0 -1.0 -1.0 -1.0

Effective interest rate 5.4 5.9 6.4 7.1 7.4 7.5


Underlying Assumptions(in percent)

Alternative Scenarios

Composition of Public Debt

Baseline Historical Constant Primary Balance

0

5

10

15

20

25

30

2013 2014 2015 2016 2017 2018 2019 2020

Gross Nominal Public Debt

(In percent of GDP)

projection

-1

0

1

2

3

4

5

2013 2014 2015 2016 2017 2018 2019 2020

Public Gross Financing Needs

(In percent of GDP)

projection

0

5

10

15

20

25

30

2008 2010 2012 2014 2016 2018 2020

By Maturity

Medium and long-term

Short-term

projection

(In percent of GDP)

0

5

10

15

20

25

30

2008 2010 2012 2014 2016 2018 2020

By Currency

Local currency-denominated

Foreign currency-denominated

projection

(In percent of GDP)

PERU


Table 11. Peru: External Debt Sustainability Framework, 2013–2020

2013 2014 2015 2016 2017 2018 2019 2020 Debt-stabilizing

non-interest

current account 6/

Baseline: External debt 27.4 30.2 32.5 31.6 30.6 29.3 27.7 26.7 -3.7

Change in external debt 0.1 2.8 2.4 -0.9 -1.0 -1.3 -1.6 -1.0

Identified external debt-creating flows (4+8+9) -4.2 0.5 -0.2 -0.6 -1.2 -1.3 -1.1 -1.1

Current account deficit, excluding interest payments 3.2 2.9 3.4 3.2 2.7 2.2 2.1 2.1

Deficit in balance of goods and services 0.6 1.5 2.3 2.0 1.5 0.9 0.7 0.7

Exports 24.0 22.4 21.7 21.8 22.2 22.4 22.2 21.9

Imports 24.6 23.9 24.0 23.8 23.7 23.3 23.0 22.6

Net non-debt creating capital inflows (negative) -6.9 -2.8 -3.5 -3.2 -3.2 -3.1 -3.0 -2.8

Automatic debt dynamics 1/ -0.5 0.4 -0.2 -0.5 -0.6 -0.4 -0.3 -0.3

Contribution from nominal interest rate 1.0 1.1 1.1 1.0 1.0 1.0 0.9 0.8

Contribution from real GDP growth -1.5 -0.6 -1.2 -1.5 -1.6 -1.4 -1.2 -1.2

Contribution from price and exchange rate changes 2/ ... ... ... ... ... ... ... ...

Residual, incl. change in gross foreign assets (2-3) 3/ 4.3 2.3 2.6 -0.4 0.2 0.0 -0.5 0.1

External debt-to-exports ratio (in percent) 113.9 134.8 150.1 144.8 137.7 130.9 124.6 121.7

Gross external financing need (in billions of US dollars) 4/ 23.1 19.6 22.2 20.6 19.6 19.3 20.7 19.5

in percent of GDP 11.4 9.6 11.7 10.2 9.1 8.3 8.4 7.4

Scenario with key variables at their historical averages 5/ 23.4 17.6 12.6 7.8 3.1 -1.1 -4.0

Key Macroeconomic Assumptions Underlying Baseline

Real GDP growth (in percent) 5.8 2.4 3.8 5.0 5.5 4.8 4.5 4.5

GDP deflator in US dollars (change in percent) -0.7 -2.0 -9.7 1.3 1.4 2.0 1.9 2.0

Nominal external interest rate (in percent) 3.9 4.0 3.3 3.3 3.4 3.4 3.3 3.2

Growth of exports (US dollar terms, in percent) -7.0 -6.7 -9.2 7.1 9.0 7.6 5.7 5.1

Growth of imports (US dollar terms, in percent) 2.9 -2.8 -5.7 5.5 6.5 5.1 4.9 4.8

Current account balance, excluding interest payments -3.2 -2.9 -3.4 -3.2 -2.7 -2.2 -2.1 -2.1

Net non-debt creating capital inflows 6.9 2.8 3.5 3.2 3.2 3.1 3.0 2.8

Source: National Authorities; and Fund staff calculations.

1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt ; r = change in domestic GDP deflator in

US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total

external debt.

3/ For projection, line includes the impact of price and exchange rate changes.

4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in

percent of GDP) remain at their levels of the last projection year.

2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic

currency (e > 0) and rising inflation (based on GDP deflator).

Projections

(In percent of GDP, unless otherwise indicated)

PERU


Figure 8. Peru: External Debt Sustainability: Bound Tests 1/ 2/

(In Percent of GDP)

i-rate

shock28

Baseline 28

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Interest rate shock (in percent)


1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation

shocks. Figures in the boxes represent average projections for the respective variables in the baseline

and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the

information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current

account balance.

4/ One-time real depreciation of 30 percent occurs in 2015.

Historical

Baseline

27

0

2

4

6

8

10

12

14

16

18

20

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Baseline and historical scenarios

CA shock 35

Baseline 27

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Combined

shock 34

Baseline 27

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Combined shock 3/

35

Baseline27

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Real depreciation shock 4/

Gross financing need under

baseline

Non-interest current account shock (in percent of GDP)

Growth

shock 28

Baseline 27

0

5

10

15

20

25

30

35

40

45

50

55

2010 2012 2014 2016 2018 2020

Growth shock (in percent per year)

Baseline:

Scenario:

Historical:

3.3

3.9

5.0

Baseline:

Scenario:

Historical:

4.7

3.4

6.0

Baseline:

Scenario:

Historical:

-2.7

-4.2

0.2

30%

depreciation

PERU


Appendix I. Peru: Social and Financial Inclusion1

Over the last decade, Peru has made progress in expanding access to financial and social

services, effectively increasing the number of stakeholders in the economy. To achieve

further gains in inclusion, the authorities are adding to existing successful programs and

implementing a variety of interesting new initiatives.

1. Over the last decade, Peru has made significant strides in reducing poverty and

inequality. The poverty rate declined by more than

half, from 59 percent in 2004 to 23 percent in 2014.

This means about ⅓ of the population has moved

into an expanding middle class since mid-2000.

Similarly, the extreme poverty rate has fallen to about

4 percent by 2014 from 20 percent in 2004. Income

distribution has also improved, with the Gini

coefficient declining to 44 by 2014.

2. Social conflicts, however, continue to pose

an important challenge. The number of conflicts has

nearly tripled from 76 in late 2006 to 211 by

March 2015. Approximately half of these have

entailed violence at some stage. Over 65 percent are

related to socio-environmental disputes in mining or

other extractive industry activities. A significant

proportion of Peru’s mineral and hydrocarbon

deposits are located on or near lands owned by

peasant and indigenous communities. Thus

accessing mineral deposits often involves moving or

displacing those living on or nearby the resource.

Mineral extraction also places additional demands

on scarce resources, such as land and water, which are often crucial for the livelihoods of nearby

communities.

3. Other important challenges include high rural poverty, malnutrition, and youth

unemployment. For example, the poverty rate is over 46 percent in rural areas and only 15 percent

in urban settings, while some 15 percent of children suffer from chronic malnutrition. Moreover,

given that approximately half of past poverty reduction is attributed to growth (with the remaining

portion linked to redistributive policies), stronger efforts will be needed to continue advancing social

inclusion in a lower growth environment.

1 Prepared by K. Ross.

-15 5 25 45 65 85 105

Argentina 1998-2011

Bolivia 1997-2011

Brazil 2003-2011

Chile 2000-2009

Costa Rica 2002-2009

Dom. Rep. 2003-2011

Ecuador 2003-2011

El Salvador 1998-2010

Guatemala 2000-2011

Honduras 2003-2011

Mexico 2000-2010

Panama 2001-2011

Paraguay 2004-2010

Peru 1997-2010

Uruguay 2004-2011

Venezuela 2004-2011

Growth Redistribution

Source: Lustig, Lopez-Calva and Ortiz-Juarez (2013).

1/ Datt and Ravallion decomposition using $4 PPP poverty

Latin America: Contribution of Growth and Redistribution to

Poverty Reduction 1/(In percent)

40

42

44

46

48

50

52

54

56

0

10

20

30

40

50

60

70

2001 2004 2007 2010 2013

Poverty Ext. Poverty Gini coefficient (rhs)

Sources: National Authorities; and World Development Indicators.

Peru: Poverty and Inequality Trends, 2001-14(In percent of total population)

PERU


4. The government has a number of initiatives to promote social inclusion and poverty

reduction:

Increased allocations for social

programs. Peru’s social safety net

consists of 5 programs focused on:

(i) the provision of school meals (Qali

Warma); (ii) human capital

development of female headed

households (Juntos); (iii) elderly

support (Pension 65); (iv) rural

assistance (Haku Winay, Foncodes,

FONIE ); and early infant development

(Cuna Mas). These programs are woven within a national social inclusion and development

strategy (Incluir para Crecer), which covers all stages of life. Social spending in 2015 will be

raised by 26 percent to fund an expansion in the coverage of Juntos and Pension 65 programs.

Education reforms. Recent efforts center on improving the quality of infrastructure, instruction,

learning processes, and school administration at primary and secondary levels. Specifically, there

are plans to raise basic compensation based upon annual teacher evaluations and additional

training; increase the number of performance-based teaching grants and bonuses; and make

major investments in new school construction as well as renovate older facilities. The length of

the school day will be expanded in a number of pilot schools, and English language classes will

be gradually introduced nationwide. The goal is to raise education spending—from the current

level of below 3 percent to around 4 and 6 percent by end-2016 and 2020, respectively—

through annual ½ percentage point of GDP increments.

Financial inclusion. Only ¼ of adults

in Peru have a bank deposit account.

Credit and deposit-to-GDP ratios have

increased gradually, but at under

35 percent, still remain low by regional

standards. Geographic isolation, high

costs, and lack of trust in the banking

system are often cited as key barriers

to greater financial inclusion. More

intensive use of financial education and

lower cost product options such as

mobile banking could help improve the

situation. In recent years, the

Superintendence of Banks, Insurance,

and Pension Funds (SBS) has taken various measures to expand access and usage of financial

services through improved regulation and supervision, transparency, consumer protection, and

Budget 1/ Coverage

Quali Warma 0.24 3 million children

Juntos 0.18 800,000 families

Pension 65 0.13 520,000 elderly

Rural assistance 0.10 20,000 households

Cuna Mas 0.06 70,000 infants

Total 0.71 Over 5 million people

1/ In percent of GDP.

Sources: Ministry of Development and Social Inclusion.

Peru: 2015 Social Programs

Obstacles

Limited financial l iteracy 73

Unsustainable growth 60

Product costs 59

Limite understanding of customers needs 55

Poor business practices 54

Opportunities

Financial education 78

Expanding the range of products 55

Moble phone banking 53

Correspondent banking 52

Provision of no-fril ls accounts 48

Source: Center for Financial Inclusion, Publication 21.

(In percent of respondents)

Peru: Obstacles and Opportunities for Financial Inclusion

PERU


financial education. In 2013, it implemented a training program for teachers on financial issues,

and in late 2014 it unveiled a “financial inclusion opportunities map.” The map is an interactive

tool that provides detailed geographical information on more than 150 indicators regarding the

access and use of financial services throughout the country. In addition, it pushed the creation of

more low cost savings products within the financial system. The banking system is also working

to improve access to financial services with the promotion of an innovative “Peruvian model”

based on electronic e-money legislation passed in 2012 and a new unified mobile payments

platform that links together financial institutions, telephone service providers, and customers.

The goal is to leverage the high penetration of mobile telephone in Peru (over 75 percent) and

create a system of mobile payments based on electronic money that can become an access

point for other financial services. The platform is expected to become operational by mid-2015

with simple utility payments and transfers allowed in the first stage.

PERU


Appendix II. Peru: External Assessment1

Peru’s external position is assessed to be broadly consistent with medium-term

fundamentals and desired policy settings. The current account deficit is expected to

narrow gradually over time, broadly financed by long-term capital flows. At the same

time, Peru has adequate international reserves and low external debt.

A. Current Account

1. The current account deficit declined slightly in 2014, despite lower terms of trade and

sluggish external demand. The current account deficit has widened since 2012, mostly reflecting

deteriorations in the terms of trade and the volume of exports. In particular, the trade surplus that

Peru had recorded since 2002 swung into deficit in 2014. Also, profit repatriation (i.e., profits realized

by nonresident corporations) continues to be large, explaining over 90 percent of the current

account deficit in 2014. Capital flows fell short of covering the current account deficit in 2014 as FDI

flows slowed and portfolio flows reversed, leading to a decline in international reserves.

2. Staff assesses that Peru’s external position is consistent with medium-term

fundamentals and desired policies settings. The External Balance Approach (EBA) estimates a

current account norm of -2.6 percent of GDP and a gap of 1 percent of GDP after adjusting for

estimated under-reporting of gold exports. This gap is likely to be corrected in coming years as the

current account deficit is projected to narrow given an expected rebound in the volume of mining

exports. Long-term capital inflows are expected to finance the projected medium-term current

account deficit of about 3 percent of GDP.

B. Exchange Rate and Competitiveness

3. The nominal and real effective exchange rates were broadly stable in 2014. The nuevo

sol depreciated by about 6½ percent in nominal terms against the U.S. dollar in 2014. However, the

nominal and real effective exchange rates depreciated only by 1¼ percent and 1½ percent,

1 Prepared by M. Tashu.

-2

-1

0

1

2

3

4

5

6

-8

-4

0

4

8

12

16

20

24

2009 2010 2011 2012 2013 2014

Trade balance, rhs

Volume of exports

Terms of trade

Gro

wth

,in

perc

en

t

In p

erc

en

t o

f G

DP

Sources: Central Reserve Bank of Peru and Fund staff calculations.

Peru: External Trade

-10

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013 2014

Trade balance

Profit repatriation

Others, net

Current account balance

Sources: Central Reserve Bank of Peru and Fund staff estimates.

Peru: Current Account Balance

(In percent of GDP)

PERU


respectively, reflecting the faster depreciation of the currencies of major trading partners against the

U.S. dollar.2 Meanwhile, cost-based indicators of competitiveness show that Peru is competitive in

mining (with the average cost of copper per pound of US$0.88 vs. Chile’s US$1.42 in 2012), but its

non-cost competitiveness indicators worsened somewhat as measured by Global Competitiveness

Report rankings (2014).

4. Staff assesses that the real exchange rate is broadly in line with fundamentals. The

estimated REER overvaluation ranges from about

2 percent, based on the real exchange rate

regression to about 7 percent based on the

current account regression. Adjusting for

estimated under-reporting of gold mining

exports, the REER overvaluation is estimated to

be in the range of 2−4.5 percent, within the

margin of estimation errors. Staff estimates

based on a time-series REER model also suggest

a small overvaluation of about ½ a percentage

point in 2014.3

2 The divergence between the bilateral and multilateral (effective) exchange rates has been notable in particular since

the fourth quarter of 2014.

3 A staff Selected Issues paper presents a model-based REER assessment.

90

100

110

120

130

90

100

110

120

130

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

REER

NEER

Spot (US$/nuevo sol)

REER average (2005-14)

Peru: Exchange Rates(Index: Jan 2005=100)

Sources: INS database; Haver; and Fund staff calculations.

88

149

361

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011 2012

Peru

Chile

World

Price of copper

Price and Cash Cost of Copper Production(cUS$ per pound)

Sources: Wood Mackenzie.

CA Regression RER Regression

CA norm -2.6 … -2.0

CA underlying 1/ -4.0 … -3.1

CA gap 2/ 1.4 … 1.1

RER gap (in percent) 3/ 7.0 1.9 5.5

Adjusted: 4/

CA underlying 1/ -3.5 … -2.6

CA gap 2/ 0.9 … 0.6

RER gap (in percent) 3/ 4.5 1.9 3.0


1/ Cyclically adjusted CA of 2014 for EBA; and medium-term CA for CGER ES.

2/ CA gap is CA norm minus CA underlying.

3/ Positive value indicate overvaluation.

EBA Methodologies

(In percent of GDP; unless stated otherwise)

Peru: Current Account and REER Gaps, 2014

4/ Adjusted for under-reporting in the illegal exports of gold estimated

at 0.5 percent of GDP.

CGER External

Sustainability

PERU


C. Capital Flows, FX Intervention, and International Reserves

5. Capital flows moderated following declines in commodity prices and rising long-term

global interest rates. After averaging about 7½ percent of GDP a year during 2010−13, net capital

inflows slowed to about 3 percent of GDP in 2014. An FDI inflow of about 3¾ percent of GDP was

partially offset by net portfolio outflows. Over two-thirds of the capital inflows during the upswing

were FDI flows, providing relative stability to the financing of the current account deficit.

6. The authorities employ FX intervention and macro-prudential measures to contain

excessive exchange rate volatility and avoid disorderly market conditions. To mitigate the

potential adverse consequences of a sharp exchange rate appreciation, the BCRP deployed a

number of measures including FX intervention (purchases), raising reserve requirements, and

encouraging outflows during 2012−14.

Total net FX purchases by the BCRP during

this period amounted to US$26 billion (13

percent of 2012 GDP). In addition, the SBS

employed prudential measures, such as

additional provisioning, capital, and

liquidity requirements for dollar credits to

contain FX risks. Some of these measures,

in particular the FX intervention, have been

reversed since the second half of 2013

when external conditions changed. In

2014, the BCRP sold US$4.2 billion in the

spot market, US$6.2 billion in dollar-

indexed securities, and US$7.9 billion in FX swaps

to contain FX volatility.4 Consequently, risks from

the capital flows cycle on credit growth and asset

prices have been contained.

7. Peru’s net international reserves

remain adequate. Net international reserves

reached US$62.3 billion (about 31 percent of

GDP) at end-2014, which is adequate with respect

to various metrics, including the IMF’s composite

adequacy measure. Peru’s NIR adjusted for the

size of its economy is similar to that of Uruguay

(also a highly dollarized economy) and larger than other LA6 countries.

4 The figures for dollar-indexed securities and FX swaps refer to gross transactions.

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

-800

-600

-400

-200

0

200

400

2-J

an

-13

2-F

eb

-13

2-M

ar-

13

2-A

pr-

13

2-M

ay-1

3

2-J

un

-13

2-J

ul-

13

2-A

ug

-13

2-S

ep

-13

2-O

ct-

13

2-N

ov-1

3

2-D

ec-1

3

2-J

an

-14

2-F

eb

-14

2-M

ar-

14

2-A

pr-

14

2-M

ay-1

4

2-J

un

-14

2-J

ul-

14

2-A

ug

-14

2-S

ep

-14

2-O

ct-

14

2-N

ov-1

4

2-D

ec-1

4

2-J

an

-15

2-F

eb

-15

2-M

ar-

15

Spot net purchase

FX swap

CDR net purchase

Spot rate, rhs

In U

S$ m

illio

ns

In U

S$ m

illio

ns

Nu

evo

sol\

US$

Sources: BCRP and Fund staff calculations.

Peru: Foreign Exchange Intervention and the Exchange Rate

0

5

10

15

20

25

30

35

Uruguay Peru Chile Brazil Mexico Colombia

Reserves to GDP

Reserve adequacy metric

20% of M2

100% of short-term debt

3-month imports

Sources: IMF Reserve Adequency Database; and Fund staff calculations.

Selected LA Countries: NIR Coverage in 2014(In Percent of GDP)

PERU


D. Foreign Asset and Liability Position

8. Peru’s international investment position

(IIP) and its composition has improved over the

last decade. The negative IIP fell significantly since

the early 2000s mostly due to accumulation of

foreign assets while the composition of the foreign

liabilities shifted significantly into non-debt

creating items. Foreign assets almost doubled

between 2000 and 2014, on the back of the BCRP’s

accumulation of international reserves. On the

other hand, while total foreign liabilities fell only by

a few percentage points of GDP, the composition

of non-debt creating liabilities (FDI and equity)

almost doubled to 60½ percent in 2014.

-120

-100

-80

-60

-40

-20

0

20

40

60

-120

-100

-80

-60

-40

-20

0

20

40

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

FDI liabilities Bonds and external debt liabilities

Equity securities liabilities Liabilities

Net international investment position Assets

Sources: Central Reserve Bank of Peru and Fund staff's calculations.

1/ Liabilities are presented in negative figures.

Peru: International Investment Position 1/(Percent of GDP)

PERU


Appendix III. Peru: New Fiscal Rules and Implications for Savings1

The fiscal framework approved in 2013 became operational in the 2015 budget. It

includes a multi-annual macroeconomic framework that sets three-year projections for

the main macroeconomic and fiscal variables. The new structural deficit target implies an

important shift in the government’s fiscal policy stance compared to past years as it will

reduce savings as a share of GDP. More conservative targets would be advisable to

preserve fiscal buffers.

1. The new fiscal framework includes the following elements:

Numerical fiscal rules include a structural balance indicative target for the NFPS.

The current fiscal stabilization fund for the national government can be used if revenue declines

below the average of the past three years or during exceptional crises.

A fiscal council will provide independent analyses of macro-fiscal projections, the evolution of

public finances, and compliance with fiscal laws and rules.

2. A new methodology was introduced in 2014 to calculate the structural fiscal balance.

Non-commodity related revenues are adjusted by the non-primary GDP output gap. Direct taxes

and royalties levied on the mining and hydrocarbon sectors (i.e., natural resource revenue) are

1 Prepared by S. Vtyurina.

Peru: New Fiscal Rules 1/ 2/

NFPS NG SNGs

Budget Balance Indicative structural deficit ceiling of 1

percent of GDP … …

Expenditure …

Level of primary spending consistent with the structural balance target for the nonfinancial public sector given

spending limits for sub-national governments and projections for other

entities of the nonfinancial public sector. 1/ 2/

The growth rate of wage and pension spending cannot exceed the nominal

growth rate of potential GDP.

Primary spending growth at time t below the average revenue growth rate over the previous four years (from

t-6)

Debt Debt ceiling at 30 percent of GDP … Debt/(average of last 4 years revenue) <100 percent

Other … New permanent spending requires new

permanent revenue sources Restrictions on external borrowing

Source: Fund staff and Country Documents.

1/ The limit can rise by up to 0.2 percent of GDP in case of budget under-execution in the previous year. If the expected output gap (positive or negative) is larger

than 2 percent, the expenditure limit must adjust, counter cyclically, by up to ¼ of the output gap. When new tax measures yield a permanent change in revenue

of 0.3 percent of GDP or more, the expenditure limit changes accordingly.

2/ In the first seven months of election years, two additional limits apply: (1) the budget execution of national government’s primary spending cannot exceed

60 percent of the annual budget and (2) no measures can be taken that increase future current spending or reduce the fiscal space for the future administration.

PERU


instead assumed to depend on a Peru-specific export price index that reflects Peru’s commodity-

related export basket. No cyclical adjustment is made on expenditures, capital revenue, or the

balance of state-owned enterprises. To calculate the price gap between current and structural prices

and compute structural resource revenues, the methodology assumes a 30-year price cycle

according to which current market prices would steadily decline over the next 20 years, converging

to pre-2002 levels by 2033. Then, structural prices are derived using an HP filter over the 1980–2033

price series, and the price gap is obtained as a difference.

3. In the original 2015 medium-term framework, the authorities chose an indicative

structural deficit target for the nonfinancial public sector of 1 percent of GDP for the next

three years. However, the authorities revised the targets in April 2015 due to the exceptional

economic circumstances and to account for the expected effect of the new tax measures. The

expenditure ceilings for the general government remained binding. Gradual fiscal consolidation

would commence in 2016, returning to the 1 percent structural fiscal deficit by 2018.

4. The targeted level of structural deficit will lead to a reduction of savings as a share of

GDP.2 While, over the period 2014−20, the real growth rate of government spending will average

about 5 percent, structural revenue will decline by more than 1 percentage point. Despite the

projected positive commodity price gap, maintaining this level of structural deficit would require to

use any cyclical revenue windfalls (as calculated under the rule), leading to growing overall deficits

and reducing the stock of government’s savings, as a share of GDP, by about 2 percentage points by

2020.3 The general government debt-to-GDP ratio will increase slightly and then hover at slightly

above 20 percent of GDP.

2 During 2008−2013, Peru saved on average the equivalent of a third of its natural revenue, contributing to a fast

decline in net debt and the accumulation of overall public savings of about 15½ percent of GDP by 2014.

3 Projections assume that any fiscal surplus is saved and any deficit is financed by new debt, with no saving

withdrawals, except in 2015. This assumption reflects the authorities’ preference so far to accumulate fiscal buffers

given the relatively low level of debt and the parsimonious use of the Fiscal Stabilization Fund resources.

Alternatively, part of the fiscal savings could be used to finance fiscal deficits, leaving the stock of debt unchanged.

Average 2008-13 2014 (Prel.) 2015 2016 2017 2018 2019 2020

Real GDP Growth, in percent 6.1 2.4 3.8 5.0 5.5 4.8 4.5 4.5

Output Gap, in percent -1.0 -1.7 -1.2 -0.3 0.0 0.0 0.0

Commodity price gap, in percent 1/ 34.5 26.8 20.3 14.8 10.2 6.4 3.2

Total Structural Revenue of the GG, percent of GDP 20.3 21.9 20.9 21.1 20.7 20.7 20.9 20.8

Natural Resource Related Revenue, percent of GDP 2/ 3.5 2.6 1.9 2.0 2.2 2.2 2.2 2.1


1/ Based on the authorities' methodology.

2/ Includes indirect taxes, which are adjusted by the output gap in the calculation of structural revenue.

Macroeconomic Assumptions and Fiscal Revenue Implications

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5. More conservative targets would be

advisable to preserve fiscal buffers.4 A structural

fiscal balance of around ½ percent of GDP, achieved

through careful expenditure prioritization and revenue

mobilization, would preserve the current level of

savings as a share of GDP and conserve enough

buffers to cover against macroeconomic shocks and

contingent liabilities. To avoid sudden adjustments in

the real rate of growth of government spending, and

protect fiscal space for important structural reforms

(e.g., education, poverty programs, and civil service), a

gradual move to a more conservative target would be

suitable. Over the medium-term, higher tax collection

should be achieved through widening the tax base,

streamlining exemptions, promoting formalization,

boosting the collection of local property taxes, and

reviewing excise taxes to address negative

externalities.

4 See also IMF Country Reports No. 14/21 and No. 14/22.

Prel.

Average 2008-13 2014 2015 2016 2017 2018 2019 2020

Fiscal Balances

Structural Balance, NFPS 0.3 -0.7 -2.5 -2.0 -1.5 -1.0 -1.0 -1.0

Overall Balance, NFPS 1.5 -0.2 -2.0 -1.7 -1.4 -1.0 -1.0 -1.0

Savings and debt, GG

Gross debt 23.3 19.8 20.7 21.5 21.4 20.9 20.6 21.2

Average real interest rate (in percent) -2.1 -2.4 -2.6 -2.5 -2.8 -3.1 -3.2 -3.3

Change in savings 2/ - -0.3 -1.2 -1.1 -1.4 -1.6 -1.9 -2.1

Share of natural resources saved (+)/used (-) 3/ 32.3 -6.4 -107.7 -85.1 -65.8 -48.5 -46.2 -47.0

Spending pressure, GG

Expenditure 19 21.4 22.3 21.9 21.0 20.5 20.8 20.8

Real growth rate of expenditure 10.6 7.6 8.2 3.2 1.1 2.3 5.9 4.9


1/ Balances are calculated under the authorities' methodology.

2/ Change in the General Government savings ratio to GDP, from end 2013.

3/ Calculated as overall balance as a share of natural resource revenue (including indirect tax revenue).

Fiscal Outlook under the New Rule and Structural Balance Target in Comparison with Historical Averages 1/

(In percent of GDP, unless otherwise indicated)

Proj.

15

17

19

21

23

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Peru: GG Primary Spending

( In percent of GDP)

Alternative Baseline

Sources: National Authorities and Fund staff calculations.

2

4

6

8

2013 2014 2015 2016 2017 2018 2019 2020

Peru: Illustrative Path of Accumulated GG Savings 1/

(In percent of GDP)

Alternative Baseline

1/ Fiscal Stabilization Fund and remaining balances (saldo de

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Appendix IV. Peru: Macro-Financial Stability Assessment1

Staff assesses that Peru’s macro-financial system is stable, with no signs of imminent

systemic risk. The financial sector vulnerability risk is medium, due to structurally high

dollarization, but prudential buffers remain ample. Corporate and household balance

sheets remained strong on average, but the recent deterioration of small firms’ balance

sheets calls for close monitoring. There is no evidence of over-pricing of assets.

A. Macro-financial Stability Map

1. Peru’s macro-financial system remains stable. A comparison of Peru’s latest macro

financial stability map with 2012, towards the end of the commodity boom, shows that the macro-

financial system remains stable albeit with some signs of increased macroeconomic, inward

spillovers, credit, and market and liquidity risks. However, the levels of these risks are consistent with

corresponding global risks as reported in the April 2015 Global Financial Stability Report (GFSR). In

particular, the increase in market and liquidity risks reflects widening foreign exchange funding

spreads and falling stock market turnovers. Risk appetite has come down since the third quarter of

2013, following U.S. Fed Reserve’s (USFR) announcement of tapering its quantitative easing, but is

still higher than the level before the announcement of QE3 by USFR.

Macro-Financial Stability Map

Peru Comparable GFSR Global

Source: IMF.

1 Prepared by M. Tashu.

2. Inward spillover risks

3. Credit risks

4. Market and liquidity

risks

5. Monetary and

financial conditions

6. Risk appetite

1. Macroeconomic risks

0

2

4

6

8

10

2012Q4

2014Q4

Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.

2. Emerging market

risks

3. Credit risks

4. Market and liquidity

risks

5. Monetary and

financial conditions

6. Risk appetite

1. Macroeconomic risks

0

2

4

6

8

10

April 2013

April 2015

Note: Away from center signifies higher risks, easier monetary and financial

conditions, or higher risk appetite .

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B. Financial Sector Risk Assessment

2. The financial sector vulnerability risk is assessed

to be medium, but risks are contained due to large

buffers. High dollarization of financial assets and liabilities

remain a key structural risk, although the share of credits

exposed to FX risk is lower than that suggested by the ratio

of credit dollarization.2 Non-performing loan ratios (NPLs) of

small non-bank deposit-taking institutions are increasing,

reflecting the vulnerability of their client base (small and

micro enterprises) to the business cycle. The SBS rightly

identifies FX credit risk and potential over-indebtedness of

the large informal sector, including households and

micro- and small-enterprises, as the main idiosyncratic risks

to Peru’s financial system and has built safeguard mechanisms by putting in place regulatory

requirements above international standards.3 As a result of these and other macro-prudential

requirements, the financial system has

built large buffers. The authorities’

stress test results with tail risks of

deceleration in economic activity and

large exchange rate depreciations

show that the financial system would

remain resilient.

3. The financial sector’s

exposure to external and sector-

specific shocks appears limited.

Peruvian banks’ exposure to a

tightening of external financing is

limited as over 90 percent of their

funding source is deposits, although

the deposit-to-loan ratio has come

down recently. Similarly, banks’ direct

exposure to the commodity sector is

relatively low, with only about 10 percent of banks’ credit going to the agriculture and mining

2 Although credit dollarization is high at about 38 percent, estimates by the SBS show that only 13 percent of total

credit (about 5 percent of GDP) is exposed to FX credit risk.

3 The regulatory requirements against FX credit risk include; (i) a minimum package of management measures to

identify, assess, and mitigate FX credit risk, (ii) additional provisions if in the opinion of the supervisor the

management measures adopted prove insufficient, and (iii) additional capital requirement for operations subject to

FX credit risk. To build buffers against potential over-indebtedness of households and micro-and small enterprises,

the SBS requires lower loan-to-value ratios and higher risk weighting of assets held by these clients.

89.0%

4.6%5.3%

0.7% 0.5%

Peru: Structure of the Financial System

(In percent of total assets, end-2014)

Banks

Financial companies

Municipality microfinance

Rural microfinance

Other

Sources: National Authorities and Fund staff calculations

Peru: Financial Soundness Indicator Map

2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

Overall Financial Sector Rating H M M M M M M

Credit cycle H L L L L L L

Change in credit / GDP ratio (pp, annual) 4.3 1.6 1.6 2.0 2.2 1.7 1.5

Growth of credit / GDP (%, annual) 18.0 5.8 5.4 6.5 6.7 4.9 4.0

Credit-to-GDP gap (st. dev) 1.8 -2.0 -1.6 -0.7 0.2 1.3 0.4

Balance Sheet Soundness M M M M M M M

Balance Sheet Structural Risk M M M H M H M

Deposit-to-loan ratio 105.1 105.5 102.8 95.3 95.2 98.1 90.5

FX liabilities % (of total liabilities) 55.9 53.0 44.8 43.9 38.2 43.6 43.4

FX loans % (of total loans) 54.1 47.5 47.3 45.8 44.4 41.1 38.4

Balance Sheet Buffers L M L L L L L

Leverage n.a. n.a. L L L L L

Leverage ratio (%) n.a. n.a. 7.1 7.7 7.9 7.9 8.5

Profitability L L L L L L L

ROA 2.6 2.3 2.3 2.3 2.2 2.0 1.9

ROE 30.0 23.6 22.9 23.5 21.5 20.0 18.2

Asset quality n.a. H L L M M M

NPL ratio 1.5 1.9 1.9 1.8 2.2 2.6 2.9

NPL ratio change (%, annual) n.a. 31.5 -2.6 -1.6 17.9 18.4 13.2

Source: National Authorities and Fund staff calculations.

PERU


sectors, indicating that their exposure to a commodity price shock is also limited. Nevertheless,

credit portfolio is relatively concentrated with firms, highlighting the exposure of the financial

system to corporate weaknesses, and the financial sector remains vulnerable to indirect impacts of

commodity price shocks with broader macroeconomic consequences.

4. The regulation, supervision, and safety net of the banking system were assessed to be

of high quality and well developed by the 2010 FSAP update. According to the FSAP report,

Peru’s legal framework for bank resolution is in line with best practices. Recommendations to

strengthen supervision by better balancing qualitative judgment and rule-based standards, and by

making on-site supervision more inclusive, have been implemented by the SBS since then. However,

legislation is needed to establish a special resolution regime for systemic situations in line with FSAP

recommendations.

C. Corporate and Household Balance Sheets

5. The recent increase in corporate debt issuance in the international market could be a

source of vulnerability, but macro-financial risks seem limited. During 2012−14, Peruvian

companies issued about 7½ percent of GDP debt in the international market to take advantage of

low interest rates. This along with domestic FX borrowing has created large FX asset-to-liability gaps

in some sectors, making firms in these sectors vulnerable to large exchange rate depreciations. For

instance, a 10 percent depreciation of the nuevo sol in 2015 could lead to losses in percent of 2014

sales, ranging from 1.3 percent for manufacturing sector firms to 4.3 percent for construction sector

firms (Figure 1). At the aggregate level, however, the corporate sector would gain in net terms from

such a shock as gains by the mining and financial sectors would more than offset losses by the

remaining sectors. Balance sheet and profitability indicators of issuing firms and the overall

corporate sector in general deteriorated recently, reflecting declines in commodity prices and the

slowdown in economic growth. Nevertheless, there are no indications of risk to macro-financial

stability as the corporate sector remains current on its obligations to the financial system and the

ratio of current assets to current liabilities remained comfortable at about 2, suggesting that the

Peru: Sectoral Distribution of Credits from Depository Institutions, end-2014

(In percent of total outstanding credit)


5.44.4

21.9

5.0

3.7

25.5

34.0

Agriculture and fishing Mining

Manufacturing Electricity, gas, and water

Construction Comerce

Services

(a) By economic sector

31

20 18

16

11

4

Corporate and large firms

Consumer loans

Medium size firms

Mortgage loans

Small firms

(b) By borrower type

0

50

100

150

200

250

300

350

Jan

-07

May-0

7

Sep

-07

Jan

-08

May-0

8

Sep

-08

Jan

-09

May-0

9

Sep

-09

Jan

-10

May-1

0

Sep

-10

Jan

-11

May-1

1

Sep

-11

Jan

-12

May-1

2

Sep

-12

Jan

-13

May-1

3

Sep

-13

Jan

-14

May-1

4

Sep

-14

Jan

-15

Banks' stock price

Mining companies' stock price

Metal prices

Peru: Metal Prices and Stock Market Prices(Indices, January 2007=100)

Sources: Superintendencia del Mercado de Valores, IMF Commodity Price Database, and Fund staff calculations.

PERU


corporate sector has sufficient liquidity to meet short-

term obligations. Furthermore, Peru has one of the

lowest corporate debt-at-risk ratios among emerging

economies.

6. Although comprehensive data is not

available, there are indications that the balance

sheets of small and medium firms are

deteriorating. NPL ratios of small and micro firms,

which held about 14 percent of total assets of

depository institutions as of end-2014, increased

about 2½ percentage points since end-2012 to

7¾ percent at end-2014. Similarly, NPLs of medium

firms, which held about 18 percent of total assets of

depository institutions as of end-2014, increased

about 2 percentage points to 4¾ percent during the

same period. On the other hand, consumer and

mortgage NPL ratios have been relatively low and

stable indicating that household balance sheets

remained relatively healthy.4 Although dollarization of

consumer credit is low (9⅓ percent at end-2014),

high dollarization of mortgage loans at 34 percent at

end-2014 remains the main vulnerability to

household balance sheets.

4 Growth of private consumption also remained robust at about 4 percent in 2014, when the overall economic

growth was only 2.4 percent.

Issuing sector

In billions

of US$

In percent

of 2014

Non-financial 9.3 4.6

Tradable sectors 4.4 2.2

Agriculture 0.5 0.3

Fishing 0.3 0.1

Manufacturing 1.4 0.7

Mining 1.8 0.9

International trade1/ 0.5 0.3

Non-tradable sectors 4.8 2.4

Construction 1.1 0.6

Energy2/ 2.5 1.3

Retail 0.7 0.3

Transport 0.5 0.3

Financial 5.5 2.7

Total 14.8 7.3

2/ Production and distribution of energy.

Peru: Corporate Issuance in the International

Market, 2012-14

Sources: Central Reserve Bank of Peru and Fund staff

calculations.

1/ Importing, port, maritime, and logistic services.

0

1

2

3

4

5

6

7

8

9

Corporates and

large firms

Medium firms Small and micro

firms

Consumers

loans

Mortgages

Dec-12 Dec-14

Peru: NPL Ratios at Depository Institutions by Type of Credit

(In percent)


PERU


Figure 1. Peru: Corporate Vulnerability Indicators

Sources: Apoyo Consultoria, Corporate Vulnerability Utility (IMF), Superintendencia del Mercado de Valores , Global Financial Stability

Report (April 2015), and Fund staff calculations.

Note: Debt-at-risk is the share of corporate debt held by the "weak firms" or those with interest coverage ratios (EBITDA divided by

interest expense) less than two. EBITDA= earnings before interest, taxes, depreciation, and amortization; LTM= last 12 months.

0 100 200 300 400

Retail

Construction

Consumer

goods

Manufacturing

Banking

Mining

Total

FX assets in percent of FX liabilities, 2014

-10 -5 0 5 10 15 20

Total

Mining

Banking

Manufacturing

Retail

Consumer goods

Construction

Estimated FX loss from 10% depreciation,

(% of total sales, based on end-2014 FX positions)

40.5

6.61.5

79.2

3.7 1.9

0

10

20

30

40

50

60

70

80

90

Debt-to-equity

(%)

Return on equity

(%)

Current ratio

Before issuance

2014

Non-financial companies that issued

international bonds, 2012-14

100.1

20.8

2.3

122.6

16.8

2.1

0

20

40

60

80

100

120

140

Debt-to-equity

(%)

Return on equity

(%)

Current ratio

2012 2013

All corporate sector

(b) Balance sheet and profitability indicators

(a) FX mismatches in balance sheets

-20

-10

0

10

20

30

40

50

60

2010

2014 LTM

Change 2010-14

In p

erc

en

t

(c) Corporate debt-at-risk

PERU


D. Asset Prices

7. There are no signs of asset price bubbles. After a significant appreciation during the

commodity price boom, the Lima Stock Exchange price index has moderated recently and is in line

with the trend average (Figure 2). The average price-to-earning (PE) ratio of Peruvian firms was

15 percent and was the lowest among regional peers in 2013, indicating no signs of over pricing.

Housing prices continued to increase, but there is no evidence of misalignment from the trend

average and the housing price-to-rent ratio was 15 percent―one of the lowest in the region.

Figure 2. Asset Prices

0

5,000

10,000

15,000

20,000

25,000

30,000

2005Q

1

2005Q

4

2006Q

3

2007Q

2

2008Q

1

2008Q

4

2009Q

3

2010Q

2

2011Q

1

2011Q

4

2012Q

3

2013Q

2

2014Q

1

2014Q

4Actual

HP filtered

Lima stock price index (1991=100), real

0

1,000

2,000

3,000

4,000

5,000

6,000

2005Q

1

2005Q

4

2006Q

3

2007Q

2

2008Q

1

2008Q

4

2009Q

3

2010Q

2

2011Q

1

2011Q

4

2012Q

3

2013Q

2

2014Q

1

2014Q

4

Actual

HP filtered

Median apartment prices in residential areas of Lima

(In nuevo soles, constant price, per square meter)

0

5

10

15

20

25

30

Mexico Colombia Brazil Chile Peru

Coporate price-to-earning ratios, 2013

0

5

10

15

20

25

Brazil Chile Colombia Peru Mexico

Housing price-to-earning (price-to-rent) ratios, 2013

Sources: Corporate vulnerability utility (IMF), Global property guide, Reserve Central Bank of Peru, and Fund staff calculations.

PERU STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

Prepared By

The Western Hemisphere Department (In consultation with other departments)

FUND RELATIONS _______________________________________________________________________ 2

WORLD BANK RELATIONS ______________________________________________________________ 4

RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ____________________ 8

STATISTICAL ISSUES ____________________________________________________________________ 10

TECHNICAL ASSISTANCE _______________________________________________________________ 13

CONTENTS

May 5, 2015

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FUND RELATIONS (As of March 31, 2015) Membership Status: Joined 12/31/1945; accepted the obligations of Article VIII, Sections 2(a), 3, and 4 on 2/15/1961.

General Resources Account: SDR Million Percent of Quota

Quota 638.40 100.00

Fund holdings of currency 438.31 68.66

Reserve Tranche Position 200.10 31.34

SDR Department: SDR Million Percent of Allocation

Net cumulative allocation 609.89 100.00

Holdings 531.11 87.10

Outstanding Purchases and Loans: None Latest Financial Arrangements:

Type Date of Expiration Amount Approved Amount DrawnArrangement Date (SDR Million) (SDR Million)

Stand-By Jan 26, 2007 Feb 28, 2009 172.37 0.00Stand-By Jun 09, 2004 Aug 16, 2006 287.28 0.00Stand-By Feb 01, 2002 Feb 29, 2004 255.00 0.00 Projected Payments to Fund1 (SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming

2015 2016 2017 2018 2019Principal 0.00 0.00 0.00 0.00 0.00Charges/Interest 0.03 0.04 0.04 0.04 0.04Total 0.03 0.04 0.04 0.04 0.04

1 When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section. Exchange Arrangements Peru maintains a unified, floating exchange rate. On December 31, 2015, the average of interbank buying and selling rates was 2.98 nuevos soles per U.S. dollar. The exchange system is free of restrictions, except for those maintained solely for the preservation of national or international

PERU


security, and which have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51). Last Article IV Consultation The 2013 Article IV consultation was concluded on January 23, 2014 (IMF Country Report No. 14/31). FSAP and ROSCs Several joint Fund-Bank missions visited Lima in the period September 2000–January 2001 to conduct an FSAP for Peru. The corresponding Financial System Stability Assessment (FSSA) report was discussed by the Executive Board on March 12, 2001. A follow-up FSAP mission was concluded in February 2005. More recently, the Executive Board, on April 20, 2011, took note of the staff’s analysis and recommendations in the report on Peru’s FSAP-Update. In October 2002, an FAD mission conducted a Fiscal ROSC for Peru (IMF Country Report No. 04/109, 4/16/04), while an STA mission conducted a Data ROSC for Peru in February 2003 (IMF Country Report No. 03/332, 10/24/03). Technical Assistance A list of technical assistance provided to Peru in the last several years is provided in Annex V. Resident Representative Mr. Alejandro Santos became the Senior Resident Representative in Peru in December 2014.

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WORLD BANK RELATIONS (As of April 10, 2015) A. Bank Group Strategy

The World Bank Group support to Peru is defined in the Country Partnership Strategy (CPS) approved by the Board on February 1, 2012. The CPS is closely aligned with the Government’s strategic vision of strong economic growth with greater inclusion and is focused on four strategic objectives: (i) increased access and quality of social services for the poor; (ii) connecting the poor to services and markets; (iii) sustainable growth and productivity; and (iv) inclusive governance and public sector performance. The CPS also addresses cross-cutting issues such as those of governance and gender. The CPS is a result of extensive consultations with government and civil society. The indicative lending program is at about US$250 million per annum, reflecting Government’s interest in policy reform support through Development Policy Lending and in reform implementation support through an investment lending program. The strategy includes development policy lending operations in the fiscal, social, and environmental sectors mainly through deferred drawdown options. Peru’s current lending portfolio includes 20 active projects with a commitment of US$1.7 billion and an undisbursed balance of US$1.5 billion. In addition to 14 on-going investment lending operations, there are two active DPL-DDOs (Development Policy Loans with Deferred Drawdown Option) and two DPL with a CAT DDO (Catastrophes Deferred Drawdown Options) and two GEFs. The GOP took the DPL-DDOs during the 2008–09 global financial crisis as part of its overall strategy to ensure adequate contingency funding. New lending commitments since the start of the CPS period total US$310 million in seven new projects. Some large investment projects (for example, the Lima Metro II project) and a new CAT-DDO are expected to increase the commitment amounts significantly during the second half of the CPS implementation period (FY 15–FY 16). As Peru is becoming a stronger middle income country, demand for knowledge services is increasing. This growing demand for knowledge is reflected in the increase in the number of Reimbursable Advisory Services (RAS) arrangements in Peru with the Bank in Education, Social Protection, Financial Inclusion, Disaster Risk Management, Water Resource Management, Water Supply and Sanitation, and Justice sectors. In addition to this new stream of RASs, the Bank has continued to provide analytical services, hands-on support to improve capacities, South-South and South-North knowledge exchanges and just-in-time support on a variety of issues as demanded by the clients. Finally, the Bank’s TF portfolio (currently over US$21 million considering GEF) complements other WB support in the current core engagement areas of this CPS by providing valuable Analytic and Advisory Activities and technical assistance. They support the harmonization and alignment of funding from various development partners behind core government programs.

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B. Bank-Fund Collaboration in Specific Areas

Road to Lima events. Peru will host the 2015 WBG-IMF Annual Meetings in October, 2015. As part of the preparation activities, which involve joint organization with the Fund, the WBG is conducting a series of events under the “Road to Lima”. The seminars address development milestones that are essential for emerging economies in the 21st century: from equitable growth and quality of education and jobs to efforts to address climate change and citizen security. This process will provide a platform for knowledge exchange on challenges that middle-income countries face as they are striving to move to higher income levels by sustaining high growth and expansion of their economies, as well as by improving opportunities for the poor.

OECD. Peru has formally declared its intention to join the OECD by 2021. In July 2014, Peru’s Minister of Finance requested support from the WBG for the preparation of the Country Program. While the Bank is finalizing the framework for this technical assistance, it will coordinate the work with other development partners, including with the Fund. Tax Reform and Fiscal Decentralization. While the Fund has been active in providing various technical assistance missions in the tax area, the Bank has finalized a study on Taxation and Equity, looking at the challenges of increasing tax collection equitably. Jointly with the World Bank and IDB, staff has worked on drafting laws and regulations for fiscal decentralization. The World Bank has also focused on the design and implementation of decentralization of the social sectors and pro-poor spending policies. Customs Administration Modernization. A needs assessment mission was undertaken together with the IMF to develop an action plan for modernizing customs administration. The joint team presented a technical report to SUNAT. Public Sector Management. Bank-Fund collaboration has focused in the area of results based budgeting, the implementation of a Treasury Single Account and modernization of budget processes, institutions and information systems

PERU


Peru World Bank Portfolio Status As of April 10, 2015

(In Million of U.S. dollars)

Project Name Practice Name

Date, Board

App.

Net Comm.

Amt. ($m)

Tot. Disb. ($m)

Tot. Undisb.

Bal. ($m) % Disb

PE Sierra Rural Development Project Agriculture 4/24/2007 39.8 20.2 19.6 51PE GEF Nat'l Protected Areas System Environment & Natural Resources 5/20/2010 8.9 8.1 0.8 91PE-(APL2) Health Reform Program Health, Nutrition & Population 2/17/2009 15.0 9.7 5.3 65PE-Sierra Irrigation Water 7/27/2010 20.0 14.1 5.9 70PE Water Resources Mgmt. Water 7/2/2009 10.0 9.0 1.0 90PE Justice Services Improv. II Governance 11/18/2010 20.0 16.4 3.6 82PE Optimization of Lima Water & Sewerage Water 4/7/2011 109.5 48.8 60.7 45PE Results Nutrition for Juntos SWAp Social Protection & Labor 3/8/2011 25.0 11.7 13.3 47PE Cusco Regional Development Social, Urban, Rural and Resilience 11/22/2013 35.0 0.0 35.0 0PE Second Rural Electrification Energy & Extractives 4/21/2011 50.0 12.0 38.0 24PE HIGHER EDUCATION QUALITY IMPROVEMENT Education 12/4/2012 25.0 2.6 22.4 10PE Basic Education Education 1/17/2013 25.0 0.0 25.0 0PE-Strengthening Sust. Mgmt. Guano Islands Environment & Natural Resources 12/6/2013 8.9 2.5 6.4 28PE-National Agric. Innovation Program Agriculture 12/17/2013 40.0 0.0 40.0 0PE Social Inclusion TAL Social Protection & Labor 12/13/2012 10.0 0.8 9.2 8PE Cusco Transport Improvement Transport & ICT 2/28/2014 120.0 0.0 120.0 0

PE CAT DDO II Social, Urban, Rural and Resilience 3/12/2015 400.0 0.0 400.0 0PERU CAT DDO Social, Urban, Rural and Resilience 12/9/2010 100.0 0.0 100.0 0PE-2nd Results & Accnt.(REACT)DPL/DDO Social Protection & Labor 4/9/2009 330.0 20.0 310.0 6PE DDO First Prog. Environ DPL Environment & Natural Resources 2/17/2009 330.0 20.0 310.0 6Total 20 1,722.1 195.8 1,526.3 11Source: BI as of March 30th, 2015

Investment

Adjustment

International Financial Corporation Portfolio

As of April 10, 2015 (In millions of U.S. dollars)

Commitment Institution LN LN ET QL + QE GT RM ALL ALL LN ET QL + QE GT RM ALL ALLFiscal Year Short Name Cmtd - IFC Repayment - IFC Cmtd - IFC Cmtd - IFC Cmtd - IFC Cmtd - IFC Cmtd - IFC Cmtd - Part Out - IFC Out - IFC Out - IFC Out - IFC Out - IFC Out - IFC Out - Part

57.52 0 0 0 0 7.21 64.73 209.48 42.44 0 0 0 2.05 44.49 154.560 0 0 0 0.88 0 0.88 0 0 0 0 0.88 0 0.88 0.00

100.46 62.54 0 0 0 0 100.46 0 100.46 0 0 0 0 100.46 0.000 2.50 0.29 0 0 0 0.29 0 0 0.29 0 0 0 0.29 0.000 0 0 9.94 0 0 9.94 0 0 0 9.94 0 0 9.94 0.00

18.33 11.67 46.46 18.00 0 0 82.79 0 18.33 46.46 18.00 0 0 82.79 0.000 0 0 0 10.22 0 10.22 0 0 0 0 10.22 0 10.22 0.000 0 0 0 0 0.20 0.20 0 0 0 0 0 0 0 0.00

15.85 3.75 0 0 0 0 15.85 0 7.85 0 0 0 0 7.85 0.0036.20 3.00 0 0 0 0 36.20 0 36.20 0 0 0 0 36.20 0.00

0 0 10.63 0 0 0 10.63 0 0 9.94 0 0 0 9.94 0.0016.16 9.07 12.00 0 0 0 28.16 0 16.16 11.98 0 0 0 28.14 0.00

0 0 10.50 0 0 0 10.50 0 0 0 0 0 0 0 0.000 11.82 0 0 0 0.08 0.08 0 0 0 0 0 0 0 0.000 0 9.43 0 0 0 9.43 0 0 9.43 0 0 0 9.43 0.00

7.54 20.46 0 0 0 0.77 8.31 0 7.54 0 0 0 0.27 7.81 0.000 0 16.76 0 0 0 16.76 0 0 13.41 0 0 0 13.41 0.00

10.48 37.15 0 7.00 0 0 17.48 0.00 10.48 0 7.00 0 0 17.48 0.000 0 22.65 0 0 0 22.65 0 0 3.59 0 0 0 3.59 0.000 0 0 0 0.08 0 0.08 0 0 0 0 0.08 0 0.08 0.00

240.40 59.60 0 0 0 0 240.40 0 240.40 0 0 0 0 240.40 0.000 0 2.74 0 0 0 2.74 0 0 2.74 0 0 0 2.74 0.00

33.10 3.09 0 0 0 0 33.10 0 28.04 0 0 0 0 28.04 0.000 12.00 0.33 0 0 0 0.33 0 0 0.33 0 0 0 0.33 0.00

536.05 236.63 131.79 34.94 11.18 8.26 722.22 209.48 507.91 98.18 34.94 11.18 2.32 654.53 154.56

2001/ 2012 UPC1994/ 1995/ 2000 YanacochaTotal Portfolio

2007/ 2009/ 2010/ 2011 PHMC2008 Peru LNG2009/ 2010/ 2011/ 2012/ 2014 Protecta

2007 Lima JCIAirport2002/ 2006/ 2007/ 2008/ 2012 MIBANCOPERU2014 PEIP

2002/ 2003 ISA Peru, SA2012 La Positiva Vida2000/ 2007 Laredo

2010 Enfoca2009/ 2011/ 2014 F. Confianza2015 HMC Capital

2004/ 2007/ 2009 Cartones America2012/ 2015 Compartamos Peru2004/ 2005/ 2008/ 2014 EDYFICAR

BPZR2007/ 2009/ 2010/ 2011/ 2012/ 2013/ 2014 BanBif2015 Banco Financiero

2011 Arequipa Region2007/ 2008/ 2011/ 2013 B.Continental2007/ 2008/ 2009/ 2010 BPZ

2013/ 2015 APMTC

PERU

INTERN

ATION

ALM

ON

ETARYFU

ND

7

2011 ARTICLE IV REPORT—

INFO

RMATIO

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PERU

PERU

PERU


RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK A. Country Strategy

Peru’s current Country Strategy covers the period 2012–16. The strategy has two pillars for the Bank’s assistance to the Peruvian authorities by supporting (i) their efforts to close economic and social gaps that still persist between urban and rural areas; and (ii) productivity gains as the main basis for inclusive, and sustainable economic growth. IDB’s strategic engagement with Peru focus on nine areas: (i) social inclusion; (ii) rural development and agriculture; (iii) housing and urban development; (iv) climate change and disaster risk management; (v) water, sanitation, water resources, and solid waste; (vi) energy; (vii) transportation; (viii) public management; and (ix) competitiveness and innovation. The Country Strategy is under implementation. The Bank has worked with the government on a multi-sector and multi-annual approach of articulated interventions addressing, in a coordinated fashion, various development gaps at the same time. Also, the Bank’s intention is to diversify the instruments of support to the country. Innovation in instruments include service contracts with the government in priority areas (“fee for services”), larger private sector operations, and extended use of knowledge sharing and technical cooperation. The Bank’s financial engagement scenario would entail positive net flows to the country between 2012 and 2016. In the base scenario, the Bank will maintain its share as a creditor in Peru’s total multilateral debt. The lending framework for the strategy is consistent with the demand assumptions and the external financing strategy of the government. B. Lending

As of February 2015, the Bank’s portfolio of active, public sector operations consisted of 21 loans for a total amount of US$890.9 million, of which US$221 million (25 percent) had been disbursed. The public sector lending program for 2014 comprised seven operations for a total of US$445 million, which includes the financing the Lima Metro Subway for US$300 million. The public sector lending program for 2015 comprises two policy-based loans for US$600 million and three investment loans for US$100 million. Regarding private sector operations, the Structured Corporate Finance Department’s (SCF) portfolio in execution consists of eight operations amounting to US$598.3 million mainly in infrastructure, the IIC portfolio comprises 19 operations for US$120.1 million, primarily in manufacture and financial services, and the Opportunities for the Majority (OMJ) department portfolio consists of four operations amounting US$19.1 million, in housing and education sectors. As of December 2014 disbursements for SCF & OMJ total have been US$113.2 million.

PERU


Private sector lending for 2015 includes one SCF project for US$57 million in agriculture sector, one OMJ operation for US$8 million in financial markets, nine MIF projects for US$7 million, and seven IIC operations for US$47 million.

Peru: IDB SG Loan Portfolio by Sector (Sovereign Guarantee)

As of February 2014 (In millions of U.S. dollars)

Sector Commitments Disbursements % DisbursedAgriculture 95.0 0 0Science, Technology and Competitiveness 40 19.8 49Social Investment 46.0 24.5 53Modernization of the State 111.0 28.5 26Water and Sanitation 125.0 19.8 16Transportation 473.9 128.4 62Total 890.9 221 25

PERU


STATISTICAL ISSUES General. Macroeconomic statistics are broadly adequate for policy formulation, surveillance and monitoring. Peru subscribes to the Special Data Dissemination Standard (SDDS). A data ROSC was prepared and published in 2003. Despite progress in recent years, there is scope for improvement in the following areas: (i) coordination among the agencies that compile official statistics to avoid duplication of efforts; (ii) expanding the coverage of the wholesale price index to include mining, oil and gas extraction, electricity and water, public transportation, and communication; (iii) finalizing the migration to the standardized report forms for monetary data with the introduction of report forms for the central bank, other depository corporations, and other financial corporation’s; and (iv) expanding the scope of data sources for compiling financial flows of individual residents. National accounts. In 2014, the National Statistics Office (INEI) released a new national account series implementing the 1993 SNA and using 2007 as the base year. Price statistics. At the present time, the official measure of inflation for Peru is the CPI for Metropolitan Lima, compiled and published by INEI. Starting in January 2010, the Metropolitan Lima CPI has been compiled using updated weights based on the 2008/09 Encuesta Nacional de Presupuestos Familiares (ENAPREF). Since January 2011, city level indices have been compiled and disseminated for the 24 departmental capitals and another large urban area using weights from the 2008/09 ENAPREF and a methodology matching that employed for the Metropolitan Lima CPI. A new law issued in 2009 requires the INEI to compile a new national level CPI that will serve as the official CPI for Peru in the future. An STA mission on the CPI was conducted in May 2–13, 2011 to evaluate the methodology of the new national CPI index. The new national level CPI, starting with the January 2012 index, was disseminated since February 2012 The WPI, statistical techniques used to compile the index generally follow international standards but the weights for the WPI are outdated, and were derived from the 1994 input-output table and other reports and publications of relevant ministries. Labor market statistics. The authorities monitor labor market developments using four indicators: open unemployment, underemployment, employment, and remunerations. While monthly unemployment, employment and income data for metropolitan area of Lima from INEI are timely, only urban employment indexes are available from the Ministry of Labor for other areas and with some delays; monthly remuneration data for the government are timely but the monthly remuneration data for the private sector are no longer available. The nationwide unemployment and underemployment situation is surveyed quarterly. It would be useful to expand the coverage of labor statistics to national level and develop competitiveness indicators such as productivity and unit labor cost indexes.

PERU


Government financial statistics. The Central Bank (BCRP) compiles government finance statistics (GFS) following the GFSM2001, for the general government and its subsectors. Data for all subsectors are reported on a cash basis and financial assets and liabilities are reported at face value. The authorities have not yet sent to the Fund information on the components of expenditures by function. The coverage of published national budget data is narrower than the fiscal statistics prepared for the combined public sector. The authorities report data for publication in the Government Finance Statistics Yearbook (GFSY) using the GFSM 2001. No high frequency data is reported for publication in International Financial Statistics (IFS). Monetary statistics. The BCRP compiles and publishes the analytical accounts of the central bank, depository corporations, and financial corporations broadly in line with the methodology recommended by the Monetary and Financial Statistics Manual. The main divergences are the exclusion of the deposits of other financial corporations, state and local governments, and public nonfinancial corporations from the definition of broad money; and valuation of some financial assets held to maturity at cost rather than at market prices or at the lower of cost or market price for investment securities. At the request of the authorities, a mission visited the country in January 2007 to assist with the migration to the new standardized report forms (SRFs) for reporting monetary data to the IMF. The mission finalized the SRF for the central bank, recommending improvements in the classification and sectorization of some accounts. A follow-up mission took place in September 2008. The mission completed the work on the SRF for the central bank and developed a bridge table linking the source data reported by banks to the BCRP to the report form 2SR (other depository corporations). The mission identified shortcomings in the management of the database that generate the accounts of the other depository corporations sector at the BCRP. Although the two technical assistant missions finalized the groundwork for the migration to the SRFs, the BCRP has not yet started reporting monetary data using the SRFs. No set date is foreseen for the migration to the SRFs. Financial soundness indicators. Peru started reporting data and metadata for financial soundness indicators (FSIs) with a quarterly frequency in June 2011. External sector statistics. The BCRP prepares quarterly data on the balance of payments and international investment position largely in line with the recommendations of the fifth edition of the Balance of Payments Manual (BPM5). Data are reported to the Fund for publication in the IFS and the Balance of Payments Statistics Yearbook. Departures from BPM5 include the lack of coverage of assets held abroad and land acquisition abroad by residents; and not recording on an accrual basis some external debt transactions. The BCRP has been reporting since August 2001 weekly data on international reserves in accordance with the Operational Guidelines for Data Template on International Reserves and Foreign Currency Liquidity. Since August 2006, the BCRP is including the full amount of the liquidity requirements in the reserve template both under official reserve assets and as a contingent net drain (as specified in Section III of the Data Template). Peru disseminates quarterly data on external debt with an eight week lag on the National Summary Data Page with a hyperlink to the Fund’s website.

PERU


Peru: Table of Common Indicators Required for Surveillance (As of March 31, 2015)

Date of Latest

ObservationDate

Received Frequency

of data7

Frequency of

Reporting7

Frequency of

Publication7

Memo Items:

Data Quality – Methodological

Soundness8

Data Quality

Accuracy and

Reliability9

Exchange Rates 03/30/15 03/31/15 D M D

International Reserve Assets and Reserve Liabilities of the Monetary Authorities1 12/31/14 03/09/15 D M W

Reserve/Base Money 12/31/14 03/09/15 W M W

O, LO, LO, LO O, O, O, O,

O

Broad Money 12/31/14 03/09/15 W M W

Central Bank Balance Sheet 12/31/14 03/09/15 W M W Consolidated Balance Sheet of the Banking System 12/31/14 03/09/15 W M W Interest Rates2 12/31/14 03/09/15 D M D

Consumer Price Index 03/30/15 04/01/15 M M M O, LO, LO, LO LO, LO, O,

O, O Revenue, Expenditure, Balance and Composition of Financing3 – CG and GG4 Q4 2014 03/12/15 Q Q Q O, LO, O, O

O, O, O, LO, O

Stocks of CG Debt5 Q4 2014 03/12/15 Q Q Q International Investment Position6 Q4 2014 02/20/15 Q Q Q

External Current Account Balance Q4 2014 02/20/15 Q Q Q O, LO, LO, LO

LO, LO, O, O, O

Exports and Imports of Goods and Services Q4 2014 02/20/15 M M M

GDP/GNP Q4 2014 3/05/15 Q Q Q LO, LO, LO, LO

LNO, LNO, LNO, LO,

LO Gross External Debt Q4 2014 02/20/15 Q Q Q

1 Every Friday the Central Bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities. 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 3 Central government (CG) and General government (GG) revenue and expenditure data are available monthly; and the composition of financing are available quarterly. Financing comprises of foreign, domestic bank, and domestic nonbank financing. 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 5 Including type of instrument, maturity and type of creditor. 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents. 7 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). 8 Reflects the assessment provided in the data ROSC published in October 2003 and based on the findings of the mission that took place during February 12–26, 2003 for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), or not available (NA). 9 Same as footnote 7, except referring to international standards concerning (respectively) source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

PERU


TECHNICAL ASSISTANCE IN 2013−14

Department Purpose FAD Treasury management

Macro-fiscal framework and fiscal rules

Tax policy and administration

General Tax Policy

MCM Payment systems

Capital market regulation

Developing fixed income swap markets

Risk based supervision of securities markets

STA Government finance statistics

Statement by the IMF Staff Representative on Peru May 20, 2015

1. This statement provides additional information that has become available sincethe staff report was issued. It does not alter the thrust of the staff appraisal.

2. Headline economic indicators remain broadly consistent with the baseline scenario inthe staff report.

Advance estimates suggest activity in primary sectors started to pick up in March,with mining up 8.7 percent (y/y) and fishing up 17.7 percent (y/y). The rebound inmining follows scheduled production plan increases, while the uptick in fishingrelates to the previously announced start of the fishing season. Leading indicators alsosuggest an improvement in April, with production of electricity up 5.8 percent (y/y),the highest rate in over a year.

On the fiscal front, regional public investment grew 31.5 percent (y/y) in April, thehighest rate since February 2014.

Headline inflation fell slightly to 2.98 percent (y/y) in April, back within the centralbank’s target range. Inflation excluding food and fuel was 2.6 percent (y/y).

3. The authorities have taken additional steps to stimulate growth broadly in line withstaff’s recommendations.

Import tariffs for a group of key agricultural products were reduced to better aligninternational and domestic prices. If these reductions are passed onto the consumer,they could help ease inflationary pressures and support economic activity.

A recently approved law facilitates budget reallocations and transfers to accelerate theexecution of the 2015 budget; and a decree enables the issuance of sovereign bonds(for about 0.2 percent of GDP) to finance 174 investment projects.

A draft law submitted to congress will extend some existing measures until end-2015,including: (i) the suspension of pension and social security tax payments on holidaybonuses; (ii) the flexible use of excess funds in unemployment insurance accounts;and (iii) monthly updates of oil price stabilization bands.

4. The central bank approved new measures to increase liquidity in local currency,promote de-dollarization, and smooth FX excess volatility. To provide liquidity in local currency at fixed rates and longer maturities, the central bank will implement a new repo operation with banks’ loan portfolios and auction public sector deposits at the central bank. The increased liquidity will help reduce the periodic spikes in local currency interbank

2

interest rates. To further encourage de-dollarization, the central bank also instituted an additional reserve requirement on dollar deposits for institutions that do not meet certain de-dollarization targets compared to December 2014. Finally, an additional reserve requirement on FX derivatives aims to moderate excess volatility in the FX market.

Statement by Oscar Hendrick , Alternative Executive Director for Peru May 20, 2014

Key Points

Peru remains one of the best performing economies in Lain America, maintaining asustained period of economic growth, low inflation, and poverty reduction for more than adecade.

Economic growth averaged 6.2 percent in the 2003-13 period, and after a temporary declinein 2014, due mainly to exogenous shocks, growth is expected to recover to around 4 percentin 2015 and to reach growth rates above full potential of about 5.0 percent over the mediumterm in order to close output gap. It is worth noting that high frequency indicators in March-April 2015 already show a turning point, and suggest that economic activity in primarysectors started to accelerate.

Inflation expectations remain well anchored, and headline inflation in 2015 and beyond isexpected to fluctuate around the mid-point of the inflation targeting range of 1-3 percent.

The external and fiscal positions are very strong, with net international reserves equivalent to30 percent of GDP. Fiscal savings, equivalent to 15 percent of GDP, accumulated during thepeak of the economic cycle, provide a substantial buffer for future shocks andcountercyclical policies. Unemployment rate is at historical low level of 5.9 percent by end-2014. The financial system remains very liquid, profitable, and well regulated. The netpublic debt is one of the lowest among emerging markets and industrialized countries, atonly 5 percent of GDP.

These outstanding achievements reflect the authorities’ sustained commitment, during morethan two decades, to sound macroeconomic policies and structural reforms; accompanied bysocial policies to ensure that the benefits of growth reach all segments of the society. Thereduction in poverty rate from near 59 percent in 2004 to 23 percent in 2014, and the declinein the Gini coefficient to 44 percent by 2014, illustrates the progress in social and financialinclusion.

The main challenges ahead are how to sustain the economic recovery in the near term, andhow to boost potential growth in the medium-term, given the uncertainty of economicgrowth among Peru’s main trading partners (U.S., China, Latam), and the evolution ofcommodity prices.

Authorities have designed a policy framework, based on three axis, to boost potentialgrowth: i) building up human capital and reducing informality; ii) boosting investment toreduce the infrastructure gap; and, iii) reducing red tape and lowering cost overruns. Thispolicy framework would be critical to provide better quality of labor force to the growthmomentum, while reinforcing the process of the improvement in the standard of living of thepopulation. In that sense, it is worth noting that, according to Moody´s, the Peruvianeconomy, along with Mexico and Chile, is the only one that shows continued momentum toadopt “second generation” reforms in order to improve long term growth.

INTRODUCTION 1. The staff has provided a well-balanced description and analysis of recent economic developments and policy discussions.1 My authorities are in broad agreement with the staff’s assessment and policy recommendations. We are also grateful for the in-depth analysis provided in the companion Selected Issues Paper, focusing on the current important topics of growth and investment dynamics, challenges in taxation, and the analysis of the Peruvian sol as a possible commodity currency. We appreciate the focus on the consultation on how to consolidate economic recovery and financial stability, while unlocking potential growth over the medium-term.

2. Peru enjoys a favorable business climate and continues to attract foreign direct investment (FDI), reinforcing the solid conditions for sustained economic growth. In percentage of GDP, Peru leads FDI in Latin America, followed by Chile, Brazil, Colombia, and Mexico. As explained in the staff report and in the Selected Issues chapter on Investment Dynamics in Peru, key structural reforms beginning in the 90s set the stage for the investment and growth boom during the last decade. According to the latest Doing Business report, in 2014, Peru was among the top 35 economies (out of 189) that improved business climate in the world, above Mexico and Chile. My authorities are mindful that with the end of the super commodity cycle, additional structural reforms are needed to maintain the growth momentum and enhance potential growth. The country risk premium continues well below the Latin American emerging markets, reflecting the strength and resilience of the Peruvian economy. For instance, Peru improved its credit rating even in periods of strong volatility in emerging markets (S&P: August 2013; Fitch: October 2013; Moody´s: July 2014). Moody’s rated Peru A3, while S&P and Fitch rated Peru BBB+.

LatAm: Sovereigns Rating1 (Long term debt in foreign currency)

Peru: Sovereign rating evolution (Long term debt in foreign currency)

Country Moody's S&P Fitch

Chile Aa3 AA- A+Peru A3 BBB+ BBB+Mexico A3 BBB+ BBB+Colombia Baa2 BBB BBBPanama Baa2 BBB BBBBrazil Baa2 BBB- BBBUruguay Baa2 BBB- BBB-Paraguay Ba1 BB BBBolivia Ba3 BB BB-Ecuador B3 B+ BVenezuela Caa3 CCC CCC

15

17

19

21

23

25

27

29

2001 2003 2005 2007 2009 2011 2013 2015

Moody's

S&P

Fitch

Investment grade

Ba1

Ba3

Baa1

Baa2

Ba2

B1

OutlookS&P

FitchMoody's

Stable

Stable

Stable

Baa3

A3

1/ Sorted by Moody’s rating Source: S&P, Fitch, Moody’s.

1 IMF, Staff Report, SM/15/103

3. The resilience of the Peruvian economy is not only rooted in its strong economic fundamentals, but also in the ability of the institutional framework to operate under conditions of strain. It is worth underscoring that the impressive economic growth of an annual average of 6.2 percent during the period 2003-13, accompanied by the lowest inflation in the region of 2.9 percent during the same period, took place during three different administrations. In each of the Presidential elections there were different degrees of uncertainty related to the orientation of economic policies and the investment climate. Yet, uncertainty was short lived and investors maintained their confidence in the business climate and the institutional framework in place. In this context, we do not see the forthcoming 2016 elections as particularly worrisome in terms of affecting long-term investment decisions. We believe that any delay in new investment would be only temporary and the strong dynamics of investment and growth will continue with renovated strength in 2016. Moreover, after more than 20 years of sustained growth and low inflation, the society has learned to appreciate the value of economic stability and improvements in the standards of living, and this would be very difficult to change dramatically by any future administration. This may be perhaps the best guarantee for continued success in the implementation of sound economic policies.

4. Peru continues to make improvements with its socially inclusive growth strategy, expanding access to financial and social services. The reduction in poverty rate from near 59 percent in 2004 to 23 percent in 2014, and the decline in the Gini coefficient to 44 percent by 2014, illustrates the progress in social and financial inclusion. Unemployment rate maintains a historical low level of 5.9 percent by end-2014. The substantial expansion of the middle class (about one third of the population) had important and positive impact on domestic demand, which has been very helpful to partially compensate for the lower external demand. The authorities are working hard to make progress on education reform and financial inclusion, while enhancing the quantity and quality of the social programs, which currently cover over 5 million people, more than half focused on children and the elderly.

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 5. After a temporary setback in 2014, economic growth is expected to recover in 2015 supported by countercyclical policies and the recovery of the primary sectors. Real GDP grew 2.4 percent in 2014, from 5.8 a year earlier. About half of the decline is explained by temporary supply shocks in fishing, mining, agriculture; and a more than expected drop in sub-national public investment that more than offset the strong fiscal stimulus from the Central Government (national public investment grew 17 percent). The lower than expected growth in China (Peru’s main trading partner), and the additional reduction in metal prices also contributed to a deceleration in economic activity. Against a widening negative output gap and stable inflation expectations, the authorities took timely fiscal and monetary countercyclical policy measures in 2014 and early 2015 to support domestic demand. The authorities are confident that these measures and the unwinding of temporary supply shocks will support economic recovery in 2015. Indeed, high-frequency indicators in April 2015 already show a turning point, and early indicators suggest that economic activity in primary sectors started to accelerate in March 2015. For instance, in March, GDP grew 2.7 percent, the highest record in the last 11 months. Furthermore, in April, electricity production grew 5.8 percent (y/y), the highest record in 13 months, and, according to BCRP, updated to 15th April, the credit in domestic currency grew 19.9 percent (y/y), the highest record in 9 months. On the fiscal side, in April 2015, the regional public investment grew 31.5 percemt, the highest record since February 2014.

6. Headline inflation was slightly above the 3 percent upper limit of the target band at some moments in 2014, but inflation is expected to remain within the target band in 2015 and beyond. A recent survey by the Central Bank shows that inflation expectations are well anchored within the band of 1-3 percent for 2015 and the following years. Core inflation has remained within the inflation target band. Headline inflation fell in April 2015 to 3.02 percent (y/y), close to the central bank’s target range. The Central Bank has the credibility and the toolbox to maintain inflation expectations within the target band, while providing the stimulus that the economy may need during the transition period.

7. Peru has a very strong external position and the real exchange rate is in line with fundamentals. Net international reserves grew to US$ 61.5 billion by May 5, 2015, equivalent to 30 percent of GDP. As explained by the staff in Appendix II, Peru: External Assessment; net international reserves are adequate by any metric, including the IMF composite adequacy metric, and Peru’s reserve adequacy is well above its regional peers. Our authorities feel comfortable with this policy, which proved to be very effective in dealing with the capital outflows during the peak of the crisis in 2008-09, and it is considered a source of strength by rating agencies, investment banks, and corporations interested in doing business in Peru. We agree with the staff’s assessment that the real exchange rate is in line with fundamentals. The authorities will continue to employ FX interventions and macro-prudential measures to contain excessive exchange rate volatility and avoid disorderly market conditions.

8. The Fiscal position remained strong in 2014 with an overall public sector deficit of 0.3 percent, despite the negative impact in tax revenues due to the lower commodity prices and the expansionary fiscal policy from the Central Government. As shown in table 2 of the staff report, the NFPS balance has been a surplus of an annual average of 1.7 percent of GDP during the 2011-13. Strong fiscal buffers coupled with a net public debt of only 5 percent of GDP, the lowest among emerging markets and industrialized countries; provide the authorities with a lot of room to maneuver in order to implement countercyclical policies when needed. Yet, the authorities are aware of the challenges ahead in terms of withdrawing the transitory fiscal stimulus and keeping the level of fiscal buffers, while increasing revenues as percentage of GDP in line with peer countries. This is clearly explained in the taxation chapter of the selected issues paper, as well as the government efforts to continue making improvements in tax administration through widening the tax base, streamlining exemptions, promoting formalization, boosting collection of local property taxes, and reviewing excise taxes to address negative externalities; while increasing the efficiency of public expenditure. In the last two weeks, the Ministry of Finance has taken additional actions to further stimulate domestic demand in 2015. A bill was submitted to Congress in April 2015 with several policies aimed at providing additional disposable income to the population,. Also, the Congress has already approved a law in order to accelerate the execution of 2015 budget through some budgetary reallocations and transfers, and a Supreme Decree was approved in order to issue bonds to finance important public investment projects. It is worth mentioning that the authorities also indicated that the Fiscal Council will be established in 2015 as a sign of commitment with the new fiscal framework.

POLICY ISSUES AND OBJECTIVES GOING FORWARD

9. We share the staff’s assessment that Peru is in a strong position to respond to shocks, should the downside risks to the outlook dominate. The Peruvian financial system is very resilient to changes in output growth, exchange rate movements, volatility induced by the liftoff in the U.S. interest rates, and other factors. Severe stress tests scenarios suggest that the system as a whole can manage very large shocks. The “acid test” took place during the 2008-09 global financial crises. The Peruvian economy had positive growth and had a strong rebound in the following year. We do not see the 2016 Presidential elections as a relevant domestic risk. Stronger than expected El Niño weather phenomenon and continuing social tensions in mining regions could be important downside risks. Yet, the authorities are confident the ongoing infrastructure projects and more in the pipeline to be finance under private public partnership schemes would create the basis for additional private investment and increasing growth potential.

10. The Peruvian authorities value the staff’s policy advice and the helpful technical assistance in a range of key issues including the design of the new Fiscal Rule. As explained in Appendix III of the staff report, important changes were introduced to improve the old fiscal rules. The new methodology based on ex ante structural fiscal balance provides three years expenditure ceilings for the budget formulation. The authorities are

assessing the staff’s suggestions to use conservative targets to preserve the hard won fiscal buffers. The temporary deviation from the fiscal rule has been done under escape clauses considered in the new Fiscal Rule , and a gradual consolidation will take place beginning in 2016.

11. There is continued gradual progress to further reduce dollarization in Peru, including a new set of measures introduced by the Central Bank in December 2014 . Despite a successful inflation targeting framework, and having one of the lowest inflation in the region and in the world for more than a decade (less than 3 percent annual average), by end 2014 38 percent of credit and 43 percent of deposits were still denominated in U.S. dollars; down from about 80 percent of credits and deposits by the end of the 1990s. There are idiosyncratic factors associated with previous hyperinflation (i.e. 7,650 percent in 1990) that partially explain this apparent inconsistent behavior by market participants. To help accelerate the de-dollarization process and reduce the currency mismatch risk to balance sheets of households or corporate, the central bank has issued new repos in domestic currency to support the expansion of credit in nuevo soles and to substitute foreign currency loans with local currency loans. The monetary authority also increased the marginal reserve requirement on foreign currency deposits by 10 percentage points twice to 70 percent, effective in January and March 2015. The authorities are aware that deepening financial and capital markets could also be an effective way to achieve lasting de-dollarization. In fact, several missions from the Capital and Monetary Market Department have provided technical assistance in related issues, but this is a gradual process and it will take time to develop.

12. The authorities agree with the staff’s assessment that Peru’s macro-financial system is stable, with no signs of imminent systemic risks. As discussed above, high dollarization of financial assets and liabilities remain a key structural risk, but as recognized by the staff, risks are contained due to large buffers by the financial system. The regulatory and supervisory banking authority has built safeguard mechanisms by putting in place regulatory requirements above international standards. It is worth to underscore that banks’ direct exposure to the commodity sector is relatively low, with only about 10 percent of banks’ credit going to the agriculture and mining sectors. The 2010 FSAP second update found that the regulation, supervision, and safety net of the banking system are of high quality and well developed. Moreover, according to the FSAP report, Peru’s legal framework for bank resolution is in line with best practices.

13. Looking ahead, how will Peru keep sustained economic growth and further reduce poverty in order to transition from an emerging market to a more advanced economy? We need to continue creating the right conditions for private investments to lead economic expansion, while strengthening regulatory agencies to protect the public interest and the general public. Peru has made great progress in many areas including civil service, infrastructure, education, health, protection to private property, capital market, etc. However, much remains to be done and new generations of structural reforms are being implemented, as it is currently done in several areas such as: i) strengthening the human capital and reducing informality (higher public resources allocated to Education and Health sectors, civil service reform, Competitiveness Agenda 2014-2018, Productive Diversification Plan, etc.),

ii) boosting the investment to reduce the infrastructure gap through a higher use of PPP schemes, and iii) reducing “red tape” and lowering cost overruns. My authorities are working in all fronts, including the planned incorporation to the OECD, which could provide the motivation and the adequate political economy framework, to make progress with the authorities’ strategy to consolidate sustained and inclusive growth, low inflation, and the modernization of the country. This will take additional time, but we need to remind ourselves that it has taken 25 years of continued implementation of sound economic policies to reach this point.